Question
In: Finance
The owner of a number of gas stations is considering installing coffee machines in his gas...
The owner of a number of gas stations is considering installing coffee machines in his gas stations. It will cost $290,000 to install the coffee machines, and they are expected to boost cash flows by $134,643 per year for their five-year working life. What must the cost of capital be if this investment has a profitability index of 1
1. 10.37%
2. 12.96%
3. 2.59%
4. 5.81%
Solutions
Expert Solution
Profitability index of 1 meaning IRR is equal to WACC.
IRR of the project is 36.70% where NPV is near $0. It makes profitability index to 1.
| Year | Cash flow | × discount rate | Present value |
| 1 | $ 134,643 | 0.73153 | $ 98,495.25 |
| 2 | $ 134,643 | 0.53513 | $ 72,052.12 |
| 3 | $ 134,643 | 0.39147 | $ 52,708.21 |
| 4 | $ 134,643 | 0.28637 | $ 38,557.58 |
| 5 | $ 134,643 | 0.20949 | $ 28,205.98 |
| Present value of inflows | $ 290,019.13 | ||
| Less: investment | $ (290,000.00) | ||
| NPV | $ 19.13 |
IRR is 36.70%
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