Question

Requirement

Each student should suggest an idea of an investment project and present a report that includes the following:

• A summary of the project idea
• An estimation of the project’s cash flow (initial Investment, operating cash flows throughout the project life and terminal cash flow at the end of the project’s life)
• The project life should be 7 years
• Choose the appropriate depreciation method of your investment.
• Tax rate 30%

• Evaluate the project using the following capital budgeting techniques

• Net present value
• Discounted payback period
• Profitability ratio
• Internal rate of return ratio
• Use 10% as discount rate

• Conclusion
• References

>> all information I have about the homework is here.

Answer 1

Initial investment 700000

Deprecitaion straight line 700000/7 = 100000

annual cash flow 200000

Terminal cash flow 20000 in year 7

Year 1-7 cash flows

Earning before depreciation interest and taxes 200000

Less: Depreciation (100000)

Earning Before taxes 100000

Less: taxes @ 30 percent (30000)

Profit after tax 70000

Add: Depreciation 100000

Cash flow 170000

Year	Cash Flows	Pv @10%	Discounted cash flows
1	170000	0.909	154530
2	170000	0.826	140420
3	170000	0.751	127670
4	170000	0.683	116110
5	170000	0.621	105570
6	170000	0.564	95880
7	170000	0.513	87210

Total discounted cash flow = 827390

Add: terminal cash flow 20000 x 0.513= 10260

Total = 837650

1) Npv 837650-700000 = 137650

2) discounted pay back period

Discounted cash flows	cumulative
1 154530	154530
2 140420	294950
3 127670	422620
4 116110	538730
5 105570	644300
6 95880	740180
7 87210	827390
7 10260	837650

644300 is recovered in 5 years so in 6th year we need to recive 700000-644300= 55700

so for 6thyear 55700/95880 =0.581

So discounted pay back period is 5.581 years

3) profitability ratio = pv of future cash flows / inflows

837650/700000 = 1.19

4) IRR - its that rate where presnt value of inflows is equal to out flow

here we will use hit and trial method using two discount rates 10% and 20%

Lower rate npv @10% Npv is 137650

Higher rate npv20% 170000 x 3.60 = 612780

20000 x.280 = 5600

Total Inflow = 618380

Npv 618380-700000 =(81620)

By interpolating formula is

Lower rate + lower rate npv / Lower rate npv- Higher rate npv x difference in rate

10% + 137650/137650 -(-81620) x 10% (20-10)

= 16.27% approx