Question

1. NPV, IRR, Profitability Index

You are reviewing a new project. The required return for assets of this risk level is 12%. The estimated cash flows are:

◦      Year 0: CF = −165,000

◦      Year 1: CF = 63,120;

◦      Year 2: CF = 70,800;

◦      Year 3: CF = 91,080;

}  What is the NPV, IRR and the profitability index?

}  Should you accept or reject this project?

2. Payback, Discounted Payback and AAR

You are reviewing a new project. The required return for assets of this risk level is 12%. The estimated cash flows are:

◦      Year 0: CF = -165,000

◦      Year 1: CF = 63,120; Net Income = 13,620

◦      Year 2: CF = 70,800; Net Income = 3,300

◦      Year 3: CF = 91,080; Net Income = 29,100

◦      Average Book Value = 72,000

◦      Assume we will accept the project if it pays back within two years and required AAR = 25%

}  What is the payback period, the discounted payback period?

}  What is the AAR?

}  Should you accept or reject this project?

Answer 1

Yr	Cash Flow	PV Factor	PV of cash flow
0	-165000	1	-165000
1	63120	0.892857	56357.14
2	70800	0.797194	56441.33
3	91080	0.71178	64828.94
	NPV		12627.41
	IRR		16%
	PI		=Total cash inflow/ Total cash putflow
			1.363636
	The project should be accepted due to positive NPV & PI is more than 1 & the IRR is more than cost of capital
Yr	Cash Flow	PV Factor	PV of cash flow	Net Income	ROI%
0	-165000	1	-165000
1	63120	0.892857	56357.14	13620	19%
2	70800	0.797194	56441.33	3300	5%
3	91080	0.71178	64828.94	29100	40%
Payback Period	2.34	Yr
Discouted Payback	2.81	Yr
AAR	21%
	The project should not be accepted due to payback is more than 2 yr and AAR is lesser than target..