Question

In: Economics

A pharmaceutical company developed four investment plans. The initial investment and the corresponding annual cash flows...

A pharmaceutical company developed four investment plans. The initial investment and the corresponding annual cash flows of the four investment plans for consecutive 5 years are shown in the following Table Q1.

Project Name I II III IV
Initial Investment (OMR) 58000 68000 97000 119000
Annual Cash inflow (OMR) 16000 23000 29000 35000

Identify the best project and decide the ranking based on the following profitability methods.

a) Average rate of return.

b) Payback period.

c) Net Present value with discounting rate at 8%

d) Benefit to cost ratio with discounting rate at 11%

e) Internal rate of return for range of suitable discounting rate

Solutions

Expert Solution

Here,

I II III IV
Initial Investment 58000 68000 97000 119000
Annual Cash Inflow 16000 23000 29000 35000

Average Rate of Return calculation, using XIRR function in excel

I II III IV
28-05-2020 Year 0 -58000 -68000 -97000 -119000
28-05-2021 Year 1 16000 23000 29000 35000
28-05-2022 Year 2 16000 23000 29000 35000
28-05-2023 Year 3 16000 23000 29000 35000
28-05-2024 Year 4 16000 23000 29000 35000
28-05-2025 Year 5 16000 23000 29000 35000
Rate of Return 11.77% 20.52% 15.09% 14.40%

Ranking, II>III>IV>I

Payback period = Initial investment / yearly benefits

I II III IV
Initial Investment 58000 68000 97000 119000
Annual Cash Inflow 16000 23000 29000 35000
Payback period 3.625 2.956522 3.344828 3.4

Ranking II>III>IV>I

Present Value using XNPV Function

Discounting Rate 8%
I II III IV
28-05-2020 Year 0 -58000 -68000 -97000 -119000
28-05-2021 Year 1 16000 23000 29000 35000
28-05-2022 Year 2 16000 23000 29000 35000
28-05-2023 Year 3 16000 23000 29000 35000
28-05-2024 Year 4 16000 23000 29000 35000
28-05-2025 Year 5 16000 23000 29000 35000
Net Present Value 5878.59 23825.47 18779.94 20734.41

Ranking II>IV>III>I

Benefit to Cost Ratio

Discounting Rate 11%
I II III IV
28-05-2020 Year 0 0 0 0 0
28-05-2021 Year 1 16000 23000 29000 35000
28-05-2022 Year 2 16000 23000 29000 35000
28-05-2023 Year 3 16000 23000 29000 35000
28-05-2024 Year 4 16000 23000 29000 35000
28-05-2025 Year 5 16000 23000 29000 35000
Present Value of Cost 58000.00 68000.00 97000.00 119000.00
Present value of Return 59128.6248 84997.4 107170.6 129343.87
Benefit to Cost 1.019 1.250 1.105 1.087

Ranking II>III>IV>I

Rahul Sunny answered 3 years ago
Next > < Previous

Related Solutions

Q1. A pharmaceutical company developed four investment plans. The initial investment and the corresponding annual cash...
Q1. A pharmaceutical company developed four investment plans. The initial investment and the corresponding annual cash flows of the four investment plans for consecutive J years are shown in the following Table Q1. Project Name I II III IV Initial Investment (OMR) A B C D Annual Cash inflow (OMR) E F G H Identify the best project and decide the ranking based on the following profitability methods. a) Average rate of return. b) Payback period. c) Net Present value...
Project E requires an initial investment of $100,000 and the produces annual cash flows of $42,000...
Project E requires an initial investment of $100,000 and the produces annual cash flows of $42,000 per year for each of the next 3 years. Project L also requires an initial investment of $100,000 and produces cash flows of $35000 in year 1, $45,000 in year 2, and $75,000 in year 3. If the discount rate is 15% and the projects are mutually exclusive. a) Project L should be chosen b) Neither project is chosen c) Project E should be...
An investment has an initial cost of $1,000. The cash flows for the following four-year life...
An investment has an initial cost of $1,000. The cash flows for the following four-year life of project are $347, $394, $424, and $600. If discount rate is 14%, calculate the discounted payback period for this project. Round your answer to 4 decimal places.
Projects A B Cost (initial investment) 40000 250000 Year Cash flows of A Cash flows of...
Projects A B Cost (initial investment) 40000 250000 Year Cash flows of A Cash flows of B 1 10000 40000 2 10000 120000 3 10000 200000 4 10000 200000 5 10000 200000 6 10000 200000 What are the Payback Periods of Projects A, and B? Assume all cash flows are evenly spread throughout the year and already discounted. If the cut-off period ( الفتره المقبوله) is three years, which projects do you accept?
An investment is expected to generate annual cash flows forever. The first annual cash flow is...
An investment is expected to generate annual cash flows forever. The first annual cash flow is expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate annually. We know that the cash flow expected in 3 years from today is expected to be $9,000 and the cash flow expected in 7 years from today is expected to be $10,000. What is the cash flow expected to be in 5 years from today?
An investment is expected to generate annual cash flows forever. The first annual cash flow is...
An investment is expected to generate annual cash flows forever. The first annual cash flow is expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate annually. We know that the cash flow expected in 2 year(s) from today is expected to be 1,860 dollars and the cash flow expected in 8 years from today is expected to be 3,140 dollars. What is the cash flow expected to be in 5 years...
Blaine Company is considering four investment proposals, each requiring the same amount of initial cash investment....
Blaine Company is considering four investment proposals, each requiring the same amount of initial cash investment. The excess present value index for each proposal is listed below. Using the index as a selection criterion, identify the index of the most attractive proposal. a. 90 b. 100 c. 110 d. 115 The primary limitation of the cash payback method is that it a. Uses before-tax cash flows. b. Identifies the length of time it will take to recover the investment outlay...
An investment that Kevin is considering offers the following cash flows. Year 1 Initial investment of...
An investment that Kevin is considering offers the following cash flows. Year 1 Initial investment of $10,000 Year 2 Inflow of $2,000 Year 3 Inflow of $1,500 Year 4 Additional investment of $5,000 Year 5 Inflow of $1,200 Year 6 Inflow of $2,200 Year 7 Inflow of 1,500 Year 8 Inflow of $1,000 Year 9 Inflow of $1,200 Year 10 Sale proceeds of $17,000 5. What is the internal rate of return (IRR) that this investment offers if all cash...
a project with an initial cost of $73,600 is expected to generate annual cash flows of...
a project with an initial cost of $73,600 is expected to generate annual cash flows of $16,360 for the next 8 years. what is the projects internal rate of retu
A corporation makes an investment of $20,000 that will provide the following cash flows after the corresponding amounts of time:
A corporation makes an investment of $20,000 that will provide the following cash flows after the corresponding amounts of time:Year 1 - $10,000Year 2 - $10,000Year 3 - $2,000Should the company make this investment? What is the net present value at a 7 percent discount rate? Round your answer to two decimal points.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT