A 6-year investment (current) requires initial capital of PLN 300,000 at the beginning and additional payment...

A 6-year investment (current) requires initial capital of PLN 300,000 at the beginning and additional payment of PLN 50,000 at the begining of second year. Investment will generate revenue of PLN 20,000 at the end of second and third year, then it will generate PLN 110,000 at the end of four year and finally PLN 280,000 at the end of fifth and sixth year. It is expected that market rates will be fixed in time at 3% per 3M under yearly capitalization? Calculate PI of this (current) investment and determine wheter this (current) investment would be better (or not) than alternative investment (which has PI of 1.14)?

Solutions

Expert Solution

Intial Cost of Plan = 300000

Additional cost of Plan = 50000/(1+0.12) = 44642.85

Total Cost of Plan = 300000+44642.85 = 344642.85

Revenue From Plan

Year Cash Flow PV@12% PV of Cash Flow

2 20000 0.797 15940

3 20000 0.712 14240

4 110000 0.636 69960

5 280000 0.567 158760

6 280000 0.507 141960

Total PV 400860

PI of Investment = PV of Cash Inflow/Initial Cost of Investment

= 400860/344642.85

= 1.16

Yes current investment would be better than the alternative investment becaue current innvents will create an additional value os $0.16 for every $1 invested in the plan compared to Alternative investment, which will be create an additional value of $0.14 for every $ 1 invested in the plan.

So Current Investment is better than th alternative Investment.

jeff jeffy answered 2 years ago

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