Question

In: Finance

Following are the 2 projects Richard Soderberg is thinking about investing in: Project 1                           &nbsp

Following are the 2 projects Richard Soderberg is thinking about investing in:

Project 1                                   

Year

Free Cash Flow

0

($900) Initial Investment

1

($90)

2

$241

3

$273

4

$283

5-15

$280

      

*Project 1 initial investment at time zero is $900 (Outflow)

Project 2

Year

Free Cash Flow

0

($1900) Initial Investment

1

($1400)

2

$116

3

$635

4

$690

5

$755

6

$826

7-15

$849

*Project 2 initial investment at time zero is $1900 (Outflow)

Question) Find the following:

1) Discounted payback period of project 1 and 2 at the following rates: 8%,20%

2) Net Present Value of project 1 and 2 at the following rates: 8%, 20%

3) Profitability Index of both project 1 and 2

Note: Please do not solve using excel sheet formula or financial calculator

Solutions

Expert Solution

1] Project 1                                   
Year Cash flow PVIF at 8% PV at 8% Cumulative PV at 8% PVIF at 10% PV at 10% Cumulative PV at 10%
0 $          -900.00 1 $           -900.00 $            -900.00 1 $          -900.00 $          -900.00
1 $            -90.00 0.92593 $             -83.33 $            -983.33 0.90909 $            -81.82 $          -981.82
2 $            241.00 0.85734 $             206.62 $            -776.71 0.82645 $           199.17 $          -782.64
3 $            273.00 0.79383 $             216.72 $            -560.00 0.75131 $           205.11 $          -577.54
4 $            283.00 0.73503 $             208.01 $            -351.99 0.68301 $           193.29 $          -384.24
5 $            280.00 0.68058 $             190.56 $            -161.42 0.62092 $           173.86 $          -210.38
6 $            280.00 0.63017 $             176.45 $                15.03 0.56447 $           158.05 $            -52.33
7 $            280.00 0.58349 $             163.38 $              178.40 0.51316 $           143.68 $              91.35
8 $            280.00 0.54027 $             151.28 $              329.68 0.46651 $           130.62 $           221.97
9 $            280.00 0.50025 $             140.07 $              469.75 0.42410 $           118.75 $           340.72
10 $            280.00 0.46319 $             129.69 $              599.44 0.38554 $           107.95 $           448.67
11 $            280.00 0.42888 $             120.09 $              719.53 0.35049 $              98.14 $           546.81
12 $            280.00 0.39711 $             111.19 $              830.72 0.31863 $              89.22 $           636.03
13 $            280.00 0.36770 $             102.96 $              933.68 0.28966 $              81.11 $           717.13
14 $            280.00 0.34046 $               95.33 $          1,029.01 0.26333 $              73.73 $           790.87
15 $            280.00 0.31524 $               88.27 $          1,117.27 0.23939 $              67.03 $           857.90
$           1,117.27 $           857.90
Discounted payback at 8% = 5+161.42/176.45 = 5.91 Years
Discounted payback at 10% = 6+134.15/143.68 = 6.93 Years
Project 2
Year Cash flow PVIF at 8% PV at 8% Cumulative PV at 8% PVIF at 10% PV at 10% Cumulative PV at 10%
0 $            -1,900 1 $       -1,900.00 $         -1,900.00 1 $      -1,900.00 $      -1,900.00
1 $            -1,400 0.92593 $       -1,296.30 $         -3,196.30 0.90909 $      -1,272.73 $      -3,172.73
2 $                  116 0.85734 $               99.45 $         -3,096.84 0.82645 $              95.87 $      -3,076.86
3 $                  635 0.79383 $             504.08 $         -2,592.76 0.75131 $           477.08 $      -2,599.77
4 $                  690 0.73503 $             507.17 $         -2,085.59 0.68301 $           471.28 $      -2,128.50
5 $                  755 0.68058 $             513.84 $         -1,571.75 0.62092 $           468.80 $      -1,659.70
6 $                  826 0.63017 $             520.52 $         -1,051.23 0.56447 $           466.26 $      -1,193.44
7 $                  849 0.58349 $             495.38 $            -555.85 0.51316 $           435.67 $          -757.77
8 $                  849 0.54027 $             458.69 $               -97.16 0.46651 $           396.06 $          -361.71
9 $                  849 0.50025 $             424.71 $              327.55 0.42410 $           360.06 $              -1.65
10 $                  849 0.46319 $             393.25 $              720.80 0.38554 $           327.33 $           325.68
11 $                  849 0.42888 $             364.12 $          1,084.93 0.35049 $           297.57 $           623.25
12 $                  849 0.39711 $             337.15 $          1,422.07 0.31863 $           270.52 $           893.76
13 $                  849 0.36770 $             312.18 $          1,734.25 0.28966 $           245.93 $        1,139.69
14 $                  849 0.34046 $             289.05 $          2,023.30 0.26333 $           223.57 $        1,363.26
15 $                  849 0.31524 $             267.64 $          2,290.94 0.23939 $           203.24 $        1,566.50
$         2,290.94 $        1,566.50
Discounted payback at 8% = 8+97.16/424.71 = 8.23 Years
Discounted payback at 10% = 9+1.65/327.33 = 9.01 Years
2] NPV: AT 8% AT 10%
Project 1 $        1,117.27 $            857.90
Project 2 $        2,290.94 $        1,566.50
3] PI:
Project 1: AT 8% AT 10%
PV of cash inflows $         2,017.27 $          1,757.90
Initial investment $             900.00 $              900.00
PI [PV of cash inflows/Initial investment] 2.24 1.95
Project 2: AT 8% AT 10%
PV of cash inflows $         4,190.94 $          3,466.50
Initial investment $         1,900.00 $          1,900.00
PI [PV of cash inflows/Initial investment] 2.21 1.82

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