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. 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 |
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.