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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%

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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%

jeff jeffy answered 1 year ago
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