Question

Calculations must be done in Excel

Polycorp is considering an investment in new plant of $3.2 million. The project will be partially financed with a loan of $2,000,000 which will be repaid over the next five years in equal annual end of year instalments at a rate of 6.20 percent pa. The rest of the project will be financed by equity. Assume straight-line depreciation over a five-year life, and no taxes. The project’s cash flows before loan repayments and interest are shown in the table below. Cost of capital is 12.50% pa (the required rate of return on the project). A salvage value of $220,000 is expected at the end of year five and is not included in the cash flows for year five below.

Year Year one Year two Year three Year four Year five

Net cash flow 815,000 995,000 875,000 935,000 945,000

You are required to calculate:

The amount of the annual loan repayment and produce a repayment schedule, NPV of the project (to the nearest dollar), IRR of the project (as a percentage to two decimal places), AE, the annual equivalent for the project (AE or EAV) (to the nearest dollar), PB, the payback and discounted payback in years (to one decimal place), ARR, the accounting rate of return (gross and net) (to two decimal places), PI (present value index or profitability index) (to two decimal places). Is the project acceptable? You must provide a decision or explanation for each calculation including a brief explanation of your treatment of Salvage Value and Loan Repayments is required.

Answer 1