Question

capital budgeting criteria:

You are given the following cash flow of a project with a discount rate of 7%. Calculate the Net Present Value, Internal Rate of Return, Profitability Index, and Payback Period.

Year	Cash.Flow
0	-17000
1	4500
2	8700
3	11900

Net present value = ??

Internal Rate of Return = ??

Profitability Index = ??

Payback period = ??

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Answer 1

Calculation of NPV
interest rate	7.00%
Year	Project A		PV fatctor	PV-Project A
0	(17,000)		1.000	(17,000)
1	4,500		0.935	4,206
2	8,700		0.873	7,599
3	11,900		0.816	9,714
			NPV	4,518
Calculation of IRR
			NPV@12%		NPV@15%
Year		Project A	PV factor	PV	PV Factor	PV
0		(17,000)	1.000	(17,000)	1.000	(17,000)
1		4,500	0.893	4,018	0.667	3,000
2		8,700	0.797	6,936	0.444	3,867
3		11,900	0.712	8,470	0.296	3,526
			NPV	2,424		(6,607)
		IRR	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
		IRR	=12%+3%*(2424/(2424+6607)
		IRR	12.81%
Calculation of Profitability Index
PV of inflows	21,518
PV of outflows	17,000
PI=	21518/17000
PI=	1.27
Calculation of payback period
Year	Project A	Cumulative cash flows
0	(17,000)	(17,000)
1	4,500	(12,500)
2	8,700	(3,800)
3	11,900	8,100
payback period=	2+3800/11900
payback period=	2.32	Years