Question
In: Finance
Costco, Inc. is conducting a new project with the following estimated cash flows. The initial outlay...
Costco, Inc. is conducting a new project with the following estimated cash flows. The initial outlay is estimated to be $1,950,000, and the incremental cash flows generated by this project would be $650,000 per year for 7 years. The estimated required rate of return of the project is 6%.
a. Calculate the NPV.
b. Calculate the PI.
c. Calculate the IRR.
d. Should this project be accepted?
Solutions
Expert Solution
Part A:
NPV :
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/
Rejected.
NPV < 0 , Project will be rejected.
| Year | CF | PVF @0.06 | Disc CF |
| 0 | $ -19,50,000.00 | 1.0000 | $ -19,50,000.00 |
| 1 | $ 6,50,000.00 | 0.9434 | $ 6,13,207.55 |
| 2 | $ 6,50,000.00 | 0.8900 | $ 5,78,497.69 |
| 3 | $ 6,50,000.00 | 0.8396 | $ 5,45,752.53 |
| 4 | $ 6,50,000.00 | 0.7921 | $ 5,14,860.88 |
| 5 | $ 6,50,000.00 | 0.7473 | $ 4,85,717.81 |
| 6 | $ 6,50,000.00 | 0.7050 | $ 4,58,224.35 |
| 7 | $ 6,50,000.00 | 0.6651 | $ 4,32,287.12 |
| NPV | $ 16,78,547.94 |
Part B:
| Profitability Index: |
| PI = PV of Cash inflows / PV of Cash Outflows |
| If PI > 1, Project will be accepted, |
| PI = 1, Indifference point. Project will be accepted/ Rejected. |
| PI < 1, Project will be rejected. |
| Year | CF | PVF @0.06 | Disc CF |
| 1 | $ 6,50,000.00 | 0.9434 | $ 6,13,207.55 |
| 2 | $ 6,50,000.00 | 0.8900 | $ 5,78,497.69 |
| 3 | $ 6,50,000.00 | 0.8396 | $ 5,45,752.53 |
| 4 | $ 6,50,000.00 | 0.7921 | $ 5,14,860.88 |
| 5 | $ 6,50,000.00 | 0.7473 | $ 4,85,717.81 |
| 6 | $ 6,50,000.00 | 0.7050 | $ 4,58,224.35 |
| 7 | $ 6,50,000.00 | 0.6651 | $ 4,32,287.12 |
| PV of cash Inflows | $ 36,28,547.94 | ||
| PV of cash Outflows | $ 19,50,000.00 | ||
| Profitability Index: | 1.86 |
Part C:
IRR :
IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash
Outflows.
IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in disc rate ] * 1%
If IRR > Cost of Capital - Project can be accepted
IRR = Cost of Capital - Indifferebce Point - Project will be
accepted / Rejected
IRR < Cost of Capital - Project will be erejected
| Year | Cash Flow | PVF/[email protected] | PV of Cash Flows | PVF/[email protected] | PV of Cash Flows |
| 1-7 | $ 6,50,000.00 | 3.0087 | $ 19,55,631.00 | 2.9370 | $ 19,09,060.02 |
| PV of Cash Inflows | $ 19,55,631.00 | $ 19,09,060.02 | |||
| PV of Cash Oiutflows | $ 19,50,000.00 | $ 19,50,000.00 | |||
| NPV | $ 5,631.00 | $ -40,939.98 |
PVAF = Sum [ PVF(r%, n) ]
PVF (r%, n) = 1 / ( 1 + r)6n
r = Disc rate
n = Time gap
| IRR = Rate at which least +ve NPV + [ NPV at that rate / Change in NPV due to Inc of 1% in Int Rate ] * 1% |
| = 0.27 + [5631 / 46570.98 ] * 1% |
| = 0.27 + [0.12 ] * 1% |
| = 0.27 + [0.0012] |
| = 0.2712 |
Part D:
Project can be accepted as NPV >0, PI >1 & IRR > Cost ofcapital.
Pls do rate, if the answer is correct and comment, if any further assistance is required.
jeff jeffy answered 3 years agoRelated Solutions
Medium Size Mart, Inc. is considering a project with the following cash flows: Initial cash outlay...
Medium Size Mart, Inc. is considering a project with the
following cash flows:
Initial cash outlay = $2,100,000
After–tax net operating cash flows for years 1 to 3 = $775,000
per year
Additional after–tax terminal cash flow at the end of year 3 =
$600,000
Compute the profitability index of this project if Medium Mart’s
WACC is 10%. Enter your answer rounded to two decimal places. For
example, if your answer is 123.45% or 1.2345 then enter as 1.23 in...
Given the following free cash flows, PROJECT A PROJECT B PROJECT C Initial outlay -70,000 ...
Given the following free cash flows,
PROJECT A PROJECT B PROJECT
C
Initial outlay -70,000 -140,000
-450,000
Cash inflows:
Year 1 12,000 120,000 220,000
Year 2 18,000 30,000 220,000
Year 3 22,000 30,000 220,000
Year 4 28,000 30,000 --------
Year 5 32,000 30,000 ---------
What is the IRR of project A?
What is the IRR of project B?
What is the IRR of project C?
determine the IRR for the three independent projects A, B, and
C
FINA Inc. considers a project with the following information: Initial Outlay: 1,500 After-tax cash flows: Year...
FINA Inc. considers a project with the following information:
Initial Outlay: 1,500 After-tax cash flows: Year 1: -$100 Year 2:
$1000 Year 3: $700 FINA’s assets are $500 million, financed through
bank loans, bonds, preferred stocks, and common stocks. The amounts
are as follows: Bank loans: $ 100 million borrowed at 10% Bonds:
$180 million, paying 9% coupon with quarterly payments, and
maturity of 5 years. FINA sold its $1,000 par-value bonds for
$1,070 and had to incur $20 flotation...
FINA Inc. considers a project with the following information: Initial Outlay: 1,500 After-tax cash flows: Year...
FINA Inc. considers a project with the following
information:
Initial Outlay: 1,500
After-tax cash flows:
Year 1: -$100
Year 2: $1000
Year 3: $700
FINA’s assets are $500 million, financed through bank loans,
bonds, preferred stocks, and common stocks. The amounts are as
follows:
Bank loans: $ 100 million borrowed at 10%
Bonds: $180 million, paying 9% coupon with quarterly payments,
and maturity of 5 years. FINA sold its $1,000 par-value bonds for
$1,070 and had to incur $20 flotation cost...
FINA Inc. considers a project with the following information: Initial Outlay: 1,500 After-tax cash flows: Year...
FINA Inc. considers a project with the following
information:
Initial Outlay: 1,500
After-tax cash flows:
Year 1: -$100
Year 2: $1000
Year 3: $700
FINA’s assets are $500 million, financed through bank loans,
bonds, preferred stocks, and common stocks. The amounts are as
follows:
Bank loans: $100 million borrowed at 10%
Bonds: $180 million, paying 9% coupon with quarterly payments,
and maturity of 5 years. FINA sold its $1,000 par-value bonds for
$1,070 and had to incur $20 flotation cost per...
FINA Inc. considers a project with the following information: Initial Outlay: 1,500 After-tax cash flows: Year...
FINA Inc. considers a project with the following
information:
Initial Outlay: 1,500
After-tax cash flows:
Year 1: -$100
Year 2: $1000
Year 3: $700
FINA’s assets are $500 million, financed through bank loans,
bonds, preferred stocks, and common stocks. The amounts are as
follows:
Bank loans: $ 100 million borrowed at 10%
Bonds: $180 million, paying 9% coupon with quarterly payments,
and maturity of 5 years. FINA sold its $1,000 par-value bonds for
$1,070 and had to incur $20 flotation cost...
A project has an initial outlay of $3,640. The project will generate cash flows of $4,565...
A project has an initial outlay of $3,640. The project will
generate cash flows of $4,565 in Years 1-5. What is the Equivalent
Annual Annuity (EAA) of this project? Assume an interest rate of
11%.
Note: Enter your answer rounded off to two decimal points. Do
not enter $ or comma in the answer box. If your answer is negative,
enter your answer as a negative number rounded off to two decimal
points.
A project has an initial outlay of $2,378. The project will generate annual cash flows of...
A project has an initial outlay of $2,378. The project will
generate annual cash flows of $660 over the 4-year life of the
project and terminal cash flows of $202 in the last year of the
project. If the required rate of return on the project is 13%, what
is the net present value (NPV) of the project?
Note: Enter your answer rounded off to two decimal points. Do
not enter $ or comma in the answer box.
You are considering a project with an initial cash outlay of $72,000 and expected cash flows...
You are considering a project with an initial cash outlay of
$72,000 and expected cash flows of $22,320 at the end of each
year for six years. The discount rate for this project is 10.5
percent.
a. What are the project's payback and
discounted payback periods?
b. What is the project's NPV?
c. What is the project's PI?
d. What is the project's IRR?
a. The payback period of the project is nothing years.
You are considering a project with an initial cash outlay of $87000 and expected cash flows...
You are considering a project with an initial cash outlay of
$87000 and expected cash flows of $23490 at the end of each year
for six years. The discount rate for this project is 10.1
percent.
a. What are the project's payback and discounted payback
periods?
b. What is the project's NPV?
c. What is the project's PI?
d. What is the project's IRR?
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Write a Java Program using the following instruction: Create the following 3 methods that calculate and...
- How would the S/D curves shift if a $3 tax was imposed on suppliers for each...
- Why should a time-based authentication system invalidate the current password on a successful authentication?
- Explain the difference between a market penetration strategy and a market development strategy.
- QUESTION 4 Discuss the sanctity of life versus the quality of life debate as presented by...
- 0.560 g He, 20.482 g F2, and 13.960 g Ar are placed in a 18.4-L container...
- Let X ∼ Pois(4), Y ∼ Pois(12), U ∼ Pois(3) be independent random variables. a) What...
ADVERTISEMENT