Question

Comparing all methods. Risky Business is looking at a project with the estimated cash flow as? follows: Initial investment at start of? project:???$12 comma 600 comma 000 Cash flow at end of year? one:???$2 comma 268 comma 000 Cash flow at end of years two through? six:???$2 comma 520 comma 000 each year Cash flow at end of years seven through? nine:???$2 comma 948 comma 400 each year Cash flow at end of year? ten:???$2 comma 268 comma 000 Risky Business wants to know the payback? period, NPV,? IRR, and PI of this project. The appropriate discount rate for the project is 11?%. If the cutoff period is six years for major? projects, determine whether the management at Risky Business will accept or reject the project under the five different decision models. What is the payback period for the new project at Risky? Business? 6.94 years???(Round to two decimal? places.) Under the payback? period, this project would be rejected rejected accepted . ?(Select from the? drop-down menu.) What is the NPV for the project at Risky? Business? ?$ nothing???(Round to the nearest? cent.) Under the NPV? rule, this project would be ? . ?(Select from the? drop-down menu.) What is the IRR for the new project at Risky? Business? nothing?% ?(Round to two decimal? places.) Under the IRR? rule, this project would be ? accepted rejected . ?(Select from the? drop-down menu.) What is the PI for the new project at Risky? Business? nothing???(Round to two decimal? places.) Under the PI? rule, this project would be ? rejected accepted . ?(Select from the? drop-down menu.)

Answer 1

Calculating Payback period

Year	Cash flow	Cummulative cashflow
0	-12600000	-12600000
1	2268000	-10332000
2	2520000	-7812000
3	2520000	-5292000
4	2520000	-2772000
5	2520000	-252000
6	2520000	2268000
7	2948400	5216400
8	2948400	8164800
9	2948400	11113200
10	2268000	13381200

By the end of 5th year we still have a negative balance of -252000, which will be recoverd from 6th year cash flow of 2520,000.

So payback period = 5 years + 252000 / 2520000 = 5.10 years

CALCULATION OF NPV

Year	Cash flow	DF	PV
0	-12600000	1	-12600000
1	2268000	0.9009009	2043243.24
2	2520000	0.8116224	2045288.53
3	2520000	0.7311914	1842602.28
4	2520000	0.658731	1660002.05
5	2520000	0.5934513	1495497.35
6	2520000	0.5346408	1347294.91
7	2948400	0.4816584	1420121.66
8	2948400	0.4339265	1279388.88
9	2948400	0.3909248	1152602.6
10	2268000	0.3521845	798754.398
		NPV	2484795.9

CALCULATION OF IRR

Year	Cash flow	DF ( 15%)	PV(15%)	DF(16%)	PV(16%)
0	-12600000	1	-12600000	1	-12600000
1	2268000	0.8695652	1972173.91	0.862069	1955172.4
2	2520000	0.7561437	1905482.04	0.7431629	1872770.5
3	2520000	0.6575162	1656940.91	0.6406577	1614457.3
4	2520000	0.5717532	1440818.18	0.5522911	1391773.6
5	2520000	0.4971767	1252885.37	0.476113	1199804.8
6	2520000	0.4323276	1089465.54	0.4104423	1034314.5
7	2948400	0.375937	1108412.77	0.3538295	1043231
8	2948400	0.3269018	963837.19	0.3050255	899337.06
9	2948400	0.2842624	838119.296	0.262953	775290.57
10	2268000	0.2471847	560614.913	0.2266836	514118.41
		NPV(15%)	188750.122	NPV(16%)	-299729.9

Now use the simple interpolation technique to find out the IRR

15 ........... 188,750

X ......... 0 ( NPV should be zero at IRR)

16 .......... - 299730

( X - 15 ) / ( 16 - 15) = ( 0 - 188750) / ( - 299730 - 188,750)

(X - 15 ) / 1 = - 188750 / - 488480 = 0.39

X = 15.39 %

CALCULATION OF PI ( Profitability Index)

PI = 1 + NPV / INVESTMENT = 1 + 2484795.9 / 12600000 = 1.20

What is the payback period for the new project at Risky? Business? = 5.10 Years

Under the payback? period, this project would be accepted .

What is the NPV for the project at Risky? Business? ?$ 2484795.9

Under the NPV? rule, this project would be Accepted

What is the IRR for the new project at Risky? Business? 15.39%

Under the IRR? rule, this project would be accepted

What is the PI for the new project at Risky? Business? 1.20

Under the PI? rule, this project would be accepted