Question

In: Finance

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

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?

Solutions

Expert Solution

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

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