Question

Please use the following information to answer the remaining problems: Able Corporation has a project with the following cash flows and an 9.6% cost of money: Numbers in parentheses are outflows. Both Year 0 and Year 3 cash flows are outflows. Year 0 1 2 3 4 5 6 Cash flow $(351,000) $ 95,000 $186,000 $(300,000) $ 280,000 $260,000 $268,000 23. Please calculate the net present value ______________ 24. Please calculate the profitability indexes (two decimals please)_________________ 25. Please calculate the modified profitability index using the terminal value approach in the textbook (two decimals please)_______________________ 26. Please calculate the internal rate of return (two decimals please)_____________________________ 27. Please calculate the modified internal rate of return (two decimals please and per the book)________________________ 28. Please calculate the payback period (two decimals please)________________________ 29. Please calculate the present value payback period (two decimals please)___________________ ___

Answer 1

Cost of capital = 9.6%

Cash Outflow in Year 0 = - $ 351000

Cash inflow in Year 1 = $ 95000

Cash inflow in Year 2 = $ 186000

Cash outflow in Year 3 = - $ 300000

Cash inflow in Year 4 = $ 280000

Cash inflow in Year 5 = $ 260000

Cash inflow in Year 6 = $ 268000

23.

NPV = Cash Outflow in Year 0 + Cash inflow in Year 1 / ((1 + Cost of capital ) ^ 1) + Cash inflow in Year 2 / ((1 + Cost of capital ) ^ 2) + Cash outflow in Year 3 / ((1 + Cost of capital ) ^ 3) + Cash inflow in Year 4 / ((1 + Cost of capital ) ^ 4) + Cash inflow in Year 5 / ((1 + Cost of capital ) ^ 5) + Cash inflow in Year 6 / ((1 + Cost of capital ) ^ 6)

NPV = -351000 + 95000/ (1.096) + 186000/ (1.096^2) + (-300000)/ (1.096^3) + 280000/(1.096^4) + 260000/(1.096^5) + 268000/(1.096^6)

NPV = $175730.78

24.

Profitability Index = 1 + NPV/Cash outflow in year 0 = 1 + ($175730.78/$ 351000) = 1.50

25.

Modified Profitability Index using the terminal value approach becomes

where R = Constant Cash inflows in the future = $95,000

i = Cost of Capital = 9.6% , n= project timeline = 6

P = Cash outflow in year 0

MPI = 95000 * ( 1.096 ^ 6 - 1) / ( 351000 * .096 * (1.096 ^ 6)) = 69659.55/58403.88 = 1.20

26.

IRR is the rate at which NPV is 0

-351000 + 95000/ ((1 + IRR) ^ 1) + 186000/ ((1 + IRR) ^ 2) + (-300000)/ ((1 + IRR) ^ 3) + 280000/ ((1 + IRR) ^ 4) + 260000/((1 + IRR) ^ 5) + 268000/((1 + IRR) ^ 6) = 0

Solving for IRR, we get IRR = 21.13%