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Capital Budgeting The Recycled Paper Inc. corporation is considering a project with the following cash flows....

Capital Budgeting

The Recycled Paper Inc. corporation is considering a project with the following cash flows.

Year

Cash Flow

0

($75,000)

1

$18,500

2

$18,500

3

$18,500

4

$18,500

5

$12,500

6

$12,500

7

$12,500

8

$12,500

Refer to the Capital Budgeting narrative. What is the payback period of the proposed project?

A. 1.28 years

B. 2.28 years

C. 3.28 years

D. 4.08 years

Refer to the Capital Budgeting narrative. What is the net present value of the proposed project if the discount rate is 12.5%?

A. $4,059.4

B. $3,487.5

C. $4,625.3

D. -$3.984.6

Refer to the Capital Budgeting narrative. What is the profitability index of the proposed project if the discount rate is 12.5%?

A. 0.89

B. 1.05

C. 2.03

D. 3.03

Refer to the Capital Budgeting narrative. What is the IRR of the proposed project?

A. 13.57%

B. 18.35%

C. 12.74%

D. 14.20%

Solutions

Expert Solution

1. Using excel formula to calculate pay back period
Year   0   1   2   3   4   5   6   7   8
Cash Flow   -75000.00   18500.00   18500.00   18500.00   18500.00   12500.00   12500.00   12500.00   12500.00
Cumulative Cash flow    -75000.00   -56500.00   -38000.00   -19500.00   -1000.00   11500.00   24000.00   36500.00   49000.00
Payback Period   4.08 (4+1000/12500)                          
Option d is correct option

2. NPV of project =PV of Cash Flows -Investment =18500/1.125+18500/1.125^2+18500/1.125^3+18500/1.125^4+12500/1.125^5+12500/1.125^6+12500/1.125^7+12500/1.125^8-75000 =4059.40 (Option a is correct option)

3. Profitability Index(PI) =1+NPV/Investment =1+4059.40/75000 =1.05

4.   Using Financial Calculator
CF0 =-75000;CF1 =18500;CF2 =18500; CF3 =18500; CF4 =18500; CF5=12500; CF6=12500; CF7 =12500; CF8=12500;
CPT IRR =14.20%

jeff jeffy answered 7 months ago
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