In: Accounting
Annual Depreciation (straight line method) = (12000 - 2000)/5 = $2000
Annual Operating cash flow = Benefits + Annual depreciation = 1000+2000 = $3000
1. Payback Period = Net Investment / Annual cash inflow
= (12000 - 2000) /3000 = 10000 / 3000 = 3.33 years
2. Annual rate of return = Average Accounting profit / Average Investment
= 1000/12000 = 8.34%
3.
Investment = |
12000 |
||||
Year |
1 |
2 |
3 |
4 |
5 |
Cash inflows |
3000 |
3000 |
3000 |
3000 |
3000 |
Salvage Value |
2000 |
P.V. of cash inflow = 3000*(1-1/ (1+R)^5) / R + 2000/(1+R)^5
At 12% Discount rate:
Present value of cash inflows = $11949.18
At 11% Discount rate:
Present value of cash inflows = $12274.59
So, as per the method of interpolation:
IRR = 11% + (12% - 11%)*(P.V. at 11% - 12000) / (P.V. at 11% - P.V. at 12%)
IRR = 11% + 1% * (12274.59 - 12000) / (12274.59 - 11949.18) = 11.84% or 12% approx
4. Cost of capital = 6%
NPV = Present value of cash inflows - Present value of investments
= 3000*(1-1/1.06^5)/.06 + 2000/1.06^5 - 12000 =14131.61 - 12000
= $2131.61 = $ 2132 approx
5.
Profitability index = Present value of cash inflows/ Present value of investments
= 14131.61 / 12000 = 1.18 approx