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

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

jeff jeffy answered 6 months ago

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