Question

In: Finance

Use the discounted payback method, the net present value method, and the profitability index method to...

Use the discounted payback method, the net present value method, and the profitability index method to evaluate the following project:

Year 0 Initial Investment 900,000

Year 1 Income 175,000

Year 2 Income 450,000

Year 3 Additional investment 100,000

Year 4 Income 630,000

Discount rate 7%

DPB __________ years

NPV ______________

PI ______________

Would you recommend that the board accept or reject this project? ________________ Accept or reject

Solutions

Expert Solution

Computation of Discounted payback period:

Year

Cash Flow

Calculation of PV factor

PV Factor @ 7 %

Discounted Cash Flow

'Cum Dis. Cash Flow

0

$ (900,000)

1/(1+0.07)^0

1

$   (900,000.00)

$   (900,000.00)

1

$    175,000

1/(1+0.07)^1

0.93457944

$      163,551.40

$   (736,448.60)

2

$    450,000

1/(1+0.07)^2

0.87343873

$      393,047.43

$    (343,401.17)

3

$   (100,000)

1/(1+0.07)^3

0.81629788

$      (81,629.79)

$     (425,030.96)

4

$    630,000

1/(1+0.07)^4

0.76289521

$      480,623.98

$      55,593.03

Payback Period = A +B/C

Where,

A= Last period with a negative cumulative discounted cash flow = 3

B = Absolute value of a cumulative discount cash flow at the end of the period A = $ 425,030.96

C = Total discounted cash flow during the period after A = $ 480,623.98

Discounted Payback Period = 3 +?$ (425,030.96) ?/$ 480,623.98

                           = 3 + $ 425,030.96/ $ 480,623.98

                           = 3 + 0.8843316 = 3.88 years

Computation of NPV:

Year

Cash Flow

Calculation of PV factor

PV Factor @ 7 %

PV

0

$        (900,000)

1/(1+0.07)^0

1

$   (900,000.00)

1

$           175,000

1/(1+0.07)^1

0.93457944

$      163,551.40

2

$           450,000

1/(1+0.07)^2

0.87343873

$      393,047.43

3

$        (100,000)

1/(1+0.07)^3

0.81629788

$      (81,629.79)

4

$           630,000

1/(1+0.07)^4

0.76289521

$      480,623.98

NPV

$        55,593.03

Computation of Profitability Index:

Profitability Index = 1 + Net Present Value/Initial Investment Required

                                 = 1 + $ 55,593.03/$ 900,000 + $ 81,629.79

                                 = 1 + $ 55,593.03/ $ 981,629.79

                                 = 1 + 0.056633393 = 1.06

Project should be accepted as NPV is positive and Profitability Index is greater than one.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

For the following two projects, determine the Payback Period Discounted Payback Net Present Value Profitability Index...
For the following two projects, determine the Payback Period Discounted Payback Net Present Value Profitability Index (Benefit-Cost Ratio) Internal Rate of Return Modified Internal Rate of Return             Project A Project B Year Net Income Cash Flow Net Income Cash Flow 0 (15,000) (19,000) 1 5,000 6,000 3,000 4,000 2 5,000 6,000 5,000 6,000 3 5000 6,000 7,000 8,000 4 5,000 6,000 11,000 12,000 Risk Index 1.80 .60 The firm’s cost of capital ko is 15% and the risk free...
Calculate the payback period, net present value, profitability index, and internal rate of return for Project...
Calculate the payback period, net present value, profitability index, and internal rate of return for Project A. Assume a discount rate of 20%. Should the firm accept or reject Project A? Explain. If the firm must choose between Project A and Project B, which is the better choice? Explain. Under what circumstances should the modified internal rate of return be used instead of the standard internal rate of return? Project A Project B Year Cash Flow Year Cash Flow 0...
Determine the Payback Period, the Discounted Payback Period, and the Net Present Value for the following...
Determine the Payback Period, the Discounted Payback Period, and the Net Present Value for the following after-tax cash flow projections. Also tell me whether the IRR is greater or less then the RRR. A. Year ATCF 0 $(60,000) 1 21,000 2 27,000 3 24,000 4 16,000 Assume a 16% required rate of return
Determine the Payback Period, the Discounted Payback Period, and the Net Present Value for the following...
Determine the Payback Period, the Discounted Payback Period, and the Net Present Value for the following after-tax cash flow projections. Also tell me whether the IRR is greater or less then the RRR B. Year ATCF 0 (100,000) 1 (320,000) 2 130,000 3 185,000 4 200,000 5 195,000 6 150,000 Assume a 20% required rate of return
Payback period, net present​ value, profitability​ index, and internal rate of return​ calculations)  You are considering...
Payback period, net present​ value, profitability​ index, and internal rate of return​ calculations)  You are considering a project with an initial cash outlay of ​$73 comma 00073,000 and expected cash flows of ​$21 comma 17021,170 at the end of each year for six years. The discount rate for this project is 9.99.9 percent. a.  What are the​ project's payback and discounted payback​ periods? b.  What is the​ project's NPV? c.  What is the​ project's PI? d.  What is the​ project's...
Accounting Rate of Return Payback Period Net Present Value Internal Rate of Return Profitability Index 1)...
Accounting Rate of Return Payback Period Net Present Value Internal Rate of Return Profitability Index 1) Select three of the analytical tools and provide supportive statements explaining how each can be used to screen and/or rank future available projects. 2) Select one of the analytical tools listed and provide supportive statements explaining why you believe it provides the most important information in the decision process.
Net Present Value Method, An index computed by dividing the total present value of the net...
Net Present Value Method, An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.Present Value Index, and Analysis for a service company Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows: Maintenance Equipment Ramp Facilities Computer Network Amount to be invested $679,831 $436,634 $209,605 Annual...
Please Calculate the WACC, the discounted payback period, and the net present value for the following...
Please Calculate the WACC, the discounted payback period, and the net present value for the following scenario. Show all work and clearly show how you came to your answers. A municipal stadium owned by a city stadium authority is thinking about updating it's grass field to turf. New turf will cost $750,000. A local company has offered to give you $100,000 to put their logo on the turf, which you will happily take if you decide to go forward with...
Chapter 8 discussed the following investment criteria: net present value, payback, profitability index, average accounting return,...
Chapter 8 discussed the following investment criteria: net present value, payback, profitability index, average accounting return, and the internal rate of return. Which one of these is the most valuable from a financial point of view and why?
Calculate the discounted payback, net present value, and internal rate of return for the following cash...
Calculate the discounted payback, net present value, and internal rate of return for the following cash flows. -60, -50, 6, 45, 60, 70, 60, 45, 20. Discount rate at 7%. Please show work for the internal rate of return calculation.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT