Question

Beth, inspired by her study trip to Italy, wants to start a wood-fired brick open pizza business—on wheels. She’ll build the oven on a trailer and carry it to craft fairs and other outdoor events, as well as cater parties. She has estimated the relevant costs and benefits and created the following time line showing the project’s after-tax cashflows. 10 pts

0   1 2 3 4 5

(2,300)         800 1,600         2,600        3,500        4,000

Calculate the NPV and IRR assuming a RRR of 20%, evaluate the project by each approach.

NPV ____________   Evaluation: _____________________________________________________

IRR _____________ Evaluation: _____________________________________________________

Prof Index________ Evaluation: _____________________________________________________

Answer 1

Answer : Calculation of Net Present Value :

Below is the table showing Net Present Value :

Year	Cash Inflow	Present Value Factor @20%	Present value of cash inflow
1	800	0.833333333	666.6666667
2	1600	0.694444444	1111.111111
3	2600	0.578703704	1504.62963
4	3500	0.482253086	1687.885802
5	4000	0.401877572	1607.510288
		Total Present value of cash inflow	6577.803498
		Less : Cash outflow	2300
		Net Present Value	4277.80

As the Net Present Value of the project is positive . Accept the project.

Below is the sheet showing calculation of IRR

The IRR is more than the required return , therefore Accept the project.

Calculation of Profitability Index

Profitablity Index = Present Value of Cash Inflow (calculated in NPV part) / Present Value of Cash Outflow

=  6577.803498 / 2300

= 2.86

Since Profitablity Index is more than 1 , therefore Accept the project.