Question

In: Finance

Your company is considering a project to increase greatly the amount of the technology in the office, including the addition of touchscreens, wireless communication devices, and LED televisions.

 

Your company is considering a project to increase greatly the amount of the technology in the office, including the addition of touchscreens, wireless communication devices, and LED televisions. To implement all of these changes, the investment will cost the company $200,000. The investment is expected to generate $70,000 in return the first year, but that number will decrease by $10,000 per year as that technology begins to grow obsolete. The following table describes expected cash flow from this technology boom. Calculate the PBP, IRR, ROI, NPV, BCR

Year

Cash Flow

0

-$200,000.00

1

$70,000.00

2

$60,000.00

3

$50,000.00

4

$40,000.00

Solutions

Expert Solution

Ideally the question should require a discount rate. Discount rate to calculate the present value of cash flows is missing in your question. But since you posted "I DONT HAVE THAT, or ID PROVIDE IT, THIS IS THE QUESTION", i am assuming the question us correct and the project requires you to calculate without using a discount rate.

Payback period:

Cumulative cash flow for year 0 = -200,000

Cumualtive cash flow for year 1 = -200,000 + 70,000 = -130,000

Cumulative cash flow for year 2 = -130,000 + 60,000 = -70,000

Cumulative cash flow for year 3 = -70,000 + 50,000 = -20,000

Cumulative cash flow for year 4 = -20,000 + 40,000 = 20,000

20,000 / 40,000 = 0.5

Payback period for the projcet is = 3 + 0.5 = 3.5 years

We calculate payback period to determine how much time does the project takes to recover the initial investment. Here the projcet takes 3.5 years to recover the initial investent of $200,000.

b)

IRR is the rate of return that makes NPV equal to 0

NPV = -200,000 + 70,000 / ( 1 + R) + 60,000 / ( 1 + R)2 + 50,000 / ( 1 + R)3 + 40,000 / ( 1 + R)4

Using trial and error method i.e, after trying various values for R, let's try R as 4.33

NPV = -200,000 + 70,000 / ( 1 + 0.0433) + 60,000 / ( 1 + 0.0433)2 + 50,000 / ( 1 + 0.0433)3 + 40,000 / ( 1 + 0.0433)4

NPV = 0

There for IRR is 4.33%

We calculate internal rate of retun to compare it with the cost of capital. If the IRR is greater than cost of capital we accept the project or we reject the project. As mentioned earlier, cost of capital is missing in your question. Therefore, it is impossible to make a decesion on this projcet based on IRR.

c)

Return on investment:

Total profit = 70,000 + 60,000 + 50,000 + 40,000 = 220,000

Return on investment = ( 220,000 - 200,000) / 200,000

Return on investment = 0.10 or 10%

Retunr on investment is a measure of profitabilty. Here the project is profitabe by 10%.

d)

NPV = Present value of cash inflows - present value of cash outflows

NPV = 70,000 / ( 1 + 0.05)1 + 60,000/ ( 1 + 0.05)2 + 50,000/ ( 1 + 0.05)3 + 40,000/ ( 1 + 0.05)4 - 200,000

NPV = -2,811.59

We calculate NPV to determine whether a project should be accepted or reject. If the NPV is positive, project should be accepted. If the NPV is negative, project should be rejected.

NOTE: Present values of cash flows cannot be found as cost of capital is missing

Benefit to cost ratio:

Benefit to cost ratio = Present value of cash flows / initial investment

Benefit to cost ratio = -2811.59 / 200,000

Benefit to cost ratio = -0.0141 or -1.41%

BCR is also a measure of profitability.

 


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