Use the information in the table above for the following 5 questions. A capital investment project...

Use the information in the table above for the following 5 questions.

A capital investment project is estimated to have the following after-tax cash flows, by year:

0	1	2	3	4
-$30,000	$7,500	$12,500	$5,000	$15,000

The company utilizes a discount rate of 10% to evaluate capital projects. You may have rounding errors in your calculations so choose the closest answer. Assume cash flows occur evenly over the year.

The PAYBACK for the project shown above is:

		2.16
		3.33
		3.15
		2.5
		4.5

----

The DISCOUNTED PAYBACK for the project shown above is:

		2.27
		3.39
		3.88
		Does not payback in 4 years.
		5.61

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The NET PRESENT VALUE for the project shown above is:

		$1,789
		$5,672
		$1,150
		$3,113
		$2,721

----

The INTERNAL RATE OF RETURN for the project shown above is:

		17.92%
		11.63%
		8.27%
		12.81%
		9.33%

-----

The PROFITABILITY INDEX for the project shown above is:

		0.75
		0.89
		1.60
		2.15
		1.03

----

Solutions

Expert Solution

jeff jeffy answered 1 year ago

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Subjects

Calculation of NPV
		10.00%
Year	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0	$ (30,000)	1.0000	$ (30,000)
1	$ 7,500	0.9091	$ 6,818
2	$ 12,500	0.8264	$ 10,330
3	$ 5,000	0.7513	$ 3,757
4	$ 15,000	0.6830	$ 10,245

	Net Present Value	$ 1,150


Calculation of the payback period

Year	Annual Cash flow	Cumulative cash flows
0	$ (30,000)	$ (30,000)
1	$ 7,500	$ (22,500)
2	$ 12,500	$ (10,000)
3	$ 5,000	$ (5,000)
4	$ 15,000	$ 10,000

	So payback period will lie in 4th year

	Payback period	=3+(5000/15000)
	Year	3.33
Calculation of Discounted payback period

Year	Annual Cash flow	PV factor @ 10%	Present values	Cumulative PV
0	$ (30,000)	1.0000	$ (30,000)	$ (30,000)
1	$ 7,500	0.9091	$ 6,818	$ (23,182)
2	$ 12,500	0.8264	$ 10,330	$ (12,852)
3	$ 5,000	0.7513	$ 3,757	$ (9,095)
4	$ 15,000	0.6830	$ 10,245	$ 1,150

	So payback period will lie in 4th year

	Payback period	=3+(9095/10245)
	Year	3.88


Calculation of IRR
		11.00%		12.00%
Year	Total cash flow	PV factor @ 11%	Present values	PV factor @ 12%	Present values
0	$ (30,000)	1.000	$ (30,000)	1.000	$(30,000)
1	$ 7,500	0.901	$ 6,757	0.893	$ 6,696
2	$ 12,500	0.812	$ 10,145	0.797	$ 9,965
3	$ 5,000	0.731	$ 3,656	0.712	$ 3,559
4	$ 15,000	0.659	$ 9,881	0.636	$ 9,533