Question

1. You are given the following cash flows for the project:

Time 0	Time 1	Time 2	Time 3	Time 4
-115,000	30,000	50,000	50,000	20,000

If the If the required rate of return is 13%, (1) what is the payback period, (2) what is the NPV, (3) what is the IRR, and (4) what is the Profitability Index (PI). Should we accept the project?

Answer 1

				Comments
	Payback period		2.70 Years	Payback period is within 4 year's life.So,on payback period it is acceptable.
	NPV		$           -2,375	Negative.So, on this basis project is not acceptable.
	IRR		11.98%	IRR is less than required return.So, on this basis also, project is not acceptable.
	Profitability Index		0.98	Profitability Index is less than 1.So, on this basis project is not acceptable.
The objective of investment is to create money.Negative NPV shows that project is not generating money.
So, on overall basis, we should not accept the project/
Working:
Year	Cash flow	Cumulative cash flow	Discount factor	Present value of cash flows	Cumulative present value of cash flows
a	b	c	d=1.13^-a	e=b*d	f
0	$       -1,15,000	$ -1,15,000	1.0000	$       -1,15,000	$     -1,15,000
1	$             30,000	$     -85,000	0.8850	$             26,549	$         -88,451
2	$             50,000	$     -35,000	0.7831	$             39,157	$         -49,294
3	$             50,000	$      15,000	0.6931	$             34,653	$         -14,641
4	$             20,000	$      35,000	0.6133	$             12,266	$           -2,375
	=irr(B5:B9)
	11.98%
	Payback period	=	2+(35000/50000)
		=	2.70
	Profitability index	=	Present value of cash inflows	/	Initial cost of project
		=	(-2375+115000)	/	$       1,15,000
		=	$       1,12,625	/	$       1,15,000
		=	0.98