In: Accounting
An investment project requires an investment fund of Rp 200 billion with an economic life of 5 years with no residual value. The project's capital cost is 11%. Every year the project is predicted to provide net income of:
Year |
Net Income |
1 |
Rp 20 billions |
2 |
Rp 22 billions |
3 |
Rp 24 billions |
4 |
Rp 26 billions |
5 |
Rp 28 billions |
By using the Accounting Rate of Return, NPV and MIRR methods, does
the investment need to be carried out by the company
Accounting rate of return:
Year | Net income |
1 | 20 |
2 | 22 |
3 | 24 |
4 | 26 |
5 | 28 |
120 | |
/ n | 5 |
Average net income | 24 |
/ Average investment | 100 |
ARR | 24.00% |
Accounting rate of return is 24%
NPV:
Year | Cash flow | × factor@ 11.00% | Present value |
0 | $ (200.00) | 1.0000 | $ (200.00) |
1 | $ 20.00 | 0.9009 | $ 18.02 |
2 | $ 22.00 | 0.8116 | $ 17.86 |
3 | $ 24.00 | 0.7312 | $ 17.55 |
4 | $ 26.00 | 0.6587 | $ 17.13 |
5 | $ 28.00 | 0.5935 | $ 16.62 |
$ - | |||
$ - | |||
$ - | |||
$ - | |||
$ - | |||
NPV | 3.6959 | $ (112.83) |
NPV is -112.83
MIRR:
YEARS | Amount ($) | x factor @15% | PV of Cash Outflows | PV of Cash Inflows |
0 | $ (200) | 1.00000 | $ (200.00) | $ - |
1 | $ 20.00 | 0.86957 | $ - | $ 17.39 |
2 | $ 22.00 | 0.75614 | $ - | $ 16.64 |
3 | $ 24.00 | 0.65752 | $ - | $ 15.78 |
4 | $ 26.00 | 0.57175 | $ - | $ 14.87 |
5 | $ 28.00 | 0.49718 | $ - | $ 13.92 |
Total | $ (200.00) | $ 78.59 | ||
N= | 5 | |||
MIRR = | [PV inflows/PV outflows]^1/n×(1+r) -1 | |||
= | [78.59/200]^1/5(1+0.15)-1 | |||
= | -4.60% |
MIRR is -4.60%
Project is not accepted as NPV is negative
please rate.