Question

Your company is considering an expansion into a new product line. The project cash flows are as follows:

Year.           Project A
   0.              -$60,000
   1.                  44,000
   2.                  20,000
   3.                  14,000
The required return for this project is 10%

What is the NPV?
What is the IRR?
What is the payback period?
What is the PI?

Answer 1

a)Calculation of NPV
Time	PVF @0%	Amount	PV
-	1.0000	-60,000.00	-60,000.00
1.00	0.9091	44,000.00	40,000.00
2.00	0.8264	20,000.00	16,528.93
3.00	0.7513	14,000.00	10,518.41
NPV			7,047.33
NPV is $7047.33
b) Calculation of IRR
NPV
Time	PVF @20%	Amount	PV
-	1.0000	-60,000.00	-60,000.00
1.00	0.8333	44,000.00	36,666.67
2.00	0.6944	20,000.00	13,888.89
3.00	0.5787	14,000.00	8,101.85
NPV			-1,342.59
IRR=	Lower rate+	(Lower rate NPV)	*(Higher rate- lower rate)
		(lowe rate NPV- Higher rate NPV)
	10%+	7047.33	*(20%-10%)
		(7047.33+1342.59)
	10%+8.34%
IRR=18.34%
C) Calculation of Payback period
Year	Cashflow	Cumulative cashflow
0	-60000	-60000
1	44000	-16000
2	20000	4000
3	14000	18000
Payback period= 1+16000/20000=1.8 years
Payback period= 1.8 years
d) calculation of PI:
PI= 1+ NPV/ initial investment
=1+ 7047.33/60000= 1+0.12=1.12
PI is 1.12