Question

Consider the following cash flows:
A. Payback The company requires all projects to payback within 3 years. Calculate the payback period. Should it be accepted or rejected?
B. Discounted Payback Calculate the discounted payback sing a discount rate of 8%. Should it be accepted or rejected?
Year 0 1 2 3 4 5 6 Cash Flow -$5,000 $1,200 $2,400 $1,600 $1,600 $1,400 $1,200                     
Year 0 1 2 3 4 5 6 Cash Flow -$5,000 $1,200 $2,400 $1,600 $1,600 $1,400 $1,200        
C. IRR Calculate the IRR for this project. Should it be accepted or rejected?
D. NPV Calculate the NPV for this project. Should it be accepted or rejected?
E. PI Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected?
The profitability Index is: NPV/Initial Cost

Answer 1

Calculation of NPV
Year				Annual Cash flow	PV factor @ 8%	Present values
0				(5,000)	1.000	(5,000)
1				1,200	0.926	1,111
2				2,400	0.857	2,058
3				1,600	0.794	1,270
4				1,600	0.735	1,176
5				1,400	0.681	953
6				1,200	0.630	756
				Net Present Value		2,324
Calculation of Profitability Index
PI=	Sum of Cash inflow/Sum of initial outflow
PI=	7324/5000
PI=	1.46
Calculation of payback period
Year				Annual Cash flow	Cumulative cash flows
0				(5,000)	(5,000)
1				1,200	(3,800)
2				2,400	(1,400)
3				1,600	200
4				1,600	1,800
5				1,400	3,200
6				1,200	4,400
	So payback period will lie in 3 the year
	Payback period	=2+(1400/1600)
	Year	2.875
Calculation of Discountedpayback period
Year				Annual Cash flow	PV factor @ 8%	Present values	Cumulative PV
0				(5,000)	1.000	(5,000)	(5,000)
1				1,200	0.926	1,111	(3,889)
2				2,400	0.857	2,058	(1,831)
3				1,600	0.794	1,270	(561)
4				1,600	0.735	1,176	615
5				1,400	0.681	953	1,568
6				1,200	0.630	756	2,324
	So payback period will lie in 4 the year
	Payback period	=3+(561/1176)
	Year	3.48
Calculation of IRR
Year	Annual Cash flow	PV factor @ 10%	Present values	PV factor @ 15%	Present values
0	(5,000)	1.000	(5,000)	1.000	(5,000)
1	1,200	0.909	1,091	0.870	1,043
2	2,400	0.826	1,983	0.756	1,815
3	1,600	0.751	1,202	0.658	1,052
4	1,600	0.683	1,093	0.572	915
5	1,400	0.621	869	0.497	696
6	1,200	0.564	677	0.432	519
			1,916		1,040
	IRR	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
	IRR	=10%+5%*(1916/(1916-1040))
		20.94%