Question

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.29 million and create incremental cash flows of $632,693.00 each year for the next five years. The cost of capital is 11.03%. What is the net present value of the J-Mix 2000?

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.56 million and create incremental cash flows of $443,493.00 each year for the next five years. The cost of capital is 10.74%. What is the internal rate of return for the J-Mix 2000?

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.67 million and create incremental cash flows of $639,849.00 each year for the next five years. The cost of capital is 8.28%. What is the profitability index for the J-Mix 2000?

Please answer all 3:)

Answer 1

1. Calculation of Net Present Value

Net Present Value = PV of Cash Inflows - Pv of cash outflows

Period	Cash flow	PV factor @ 11.03%	Present Value
0	-1,290,000	1.00000	-1,290,000.00
1	632,693	0.90066	569,839.68
2	632,693	0.81118	513,230.37
3	632,693	0.73060	462,244.77
4	632,693	0.65802	416,324.21
5	632,693	0.59265	374,965.52
Net Present Value	1,046,604.56

2. Calculation of Internal Rate of Return

IRR is the rate at which NPV = 0 or in other words, PV of cash inflow is equal to PV of cash outflow.

We need to calculate this by trial and error. let discount rate = 11%

Period	Cash flow	PV factor @ 11%	Present Value
0	-1,560,000	1.00000	-1,560,000.00
1	443,493	0.90090	399,543.24
2	443,493	0.81162	359,948.87
3	443,493	0.73119	324,278.26
4	443,493	0.65873	292,142.58
5	443,493	0.59345	263,191.51
Net Present Value	79,104.46

when dicount rate = 13%

Period	Cash flow	PV factor @ 13%	Present Value
0	-1,560,000	1.00000	-1,560,000.00
1	443,493	0.88496	392,471.68
2	443,493	0.78315	347,320.07
3	443,493	0.69305	307,362.90
4	443,493	0.61332	272,002.56
5	443,493	0.54276	240,710.23
Net Present Value	-132.56

Using interpolation formula,

IRR = Start rate + {NPV at start rate/ (NPV at start rate - NPV at end rate)} * Difference between rates

= 11% + [79104.46 / {79104.46 - (-132.56)}] * (13% - 11%)

= 12.996654% = 13% (appx)

This can also be calculated using excel and the ans would be 13%

Since IRR is greater than the hurdle rate of 10.74%, the project is viable

3) Calculation of Profitability Index

Profitability Index = PV of cash inflow / PV of cash Outflow

PV of cash outflow = 1,670,000

PV of cash inflow:

Period	Cash flow	PV factor @ 8.28%	Present Value
1	639,849	0.92353	590,920.76
2	639,849	0.85291	545,733.99
3	639,849	0.78769	504,002.57
4	639,849	0.72746	465,462.30
5	639,849	0.67183	429,869.13
PV of cash inflow	2,535,988.75

Profitability Index = 2,535,988.75/ 1,670,000

= 1.52 times

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