Question

In: Accounting

An investment project requires an investment fund of Rp 200 billion with an economic life of...

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

Solutions

Expert Solution

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.


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