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Question: Q4 Queen Elizabeth Enterprises is considering three new projects which will each require an inves...

Q4 Queen Elizabeth Enterprises is considering three new projects which will each require an investment in new equipment costing $45,000. Each project will last for 3 years and generate the following cash inflows:

Project A Year 1 $13,640, Year 2 $19,500 Year 3 $29,200

Project B Year 1 $18,380 Year 2 $19,500 Year 3 $20,600

Project C Year 1 $30,200 Year 2 $19,500 Year 3 $19,760

The equipment has no salvage value. Straight line depreciation is used and the cost of capital (discount rate) is 10%.     (5 points each 45 points total)

What is the cash payback period for project A? _________________________ years

What is the cash payback period for project B? __________________________ years

What is the cash payback period for project C? __________________________ years

What is project A’s net present value? $__________________________________

What is project B’s net present value? $__________________________________

What is project C’s net present value? $__________________________________

What is project A’s present value index? _______________________________

How much net income will be generated by project B over the three year period? $________________________________

What is the average rate of return for project C? $ _______________________________

Answer 1

Project A:

Investment = $45,000
Life of Project = 3 years

Annual Depreciation = Investment / Life of Project
Annual Depreciation = $45,000 / 3
Annual Depreciation = $15,000

Payback Period = 2 + $11,860/$29,200
Payback Period = 2.41 years

Present Value of Cash Inflows = $13,640/1.10 + $19,500/1.10^2 + $29,200/1.10^3
Present Value of Cash Inflows = $50,454.09

NPV = -$45,000 + $13,640/1.10 + $19,500/1.10^2 + $29,200/1.10^3
NPV = $5,454.09

Present Value Index = Present Value of Cash Inflows / Investment
Present Value Index = $50,454.09 / $45,000
Present Value Index = 1.12 years

Project B:

Investment = $45,000
Life of Project = 3 years

Annual Depreciation = Investment / Life of Project
Annual Depreciation = $45,000 / 3
Annual Depreciation = $15,000

Payback Period = 2 + $7,120/$20,600
Payback Period = 2.35 years

Present Value of Cash Inflows = $18,380/1.10 + $19,500/1.10^2 + $20,600/1.10^3
Present Value of Cash Inflows = $48,301.88

NPV = -$45,000 + $18,380/1.10 + $19,500/1.10^2 + $20,600/1.10^3
NPV = $3,301.88

Net Income = Cash Inflow – Depreciation

Net Income = ($18,380 - $15,000) + ($19,500 - $15,000) + ($20,600 - $15,000)
Net Income = $13,480

Project C:

Investment = $45,000
Life of Project = 3 years

Annual Depreciation = Investment / Life of Project
Annual Depreciation = $45,000 / 3
Annual Depreciation = $15,000

Payback Period = 1 + $14,800/$19,500
Payback Period = 1.76 years

Present Value of Cash Inflows = $30,200/1.10 + $19,500/1.10^2 + $19,760/1.10^3
Present Value of Cash Inflows = $58,416.23

NPV = -$45,000 + $30,200/1.10 + $19,500/1.10^2 + $19,760/1.10^3
NPV = $13,416.23

Net Income = ($30,200 - $15,000) + ($19,500 - $15,000) + ($19,760 - $15,000)
Net Income = $24,460

Average Net Income = $24,460 / 3
Average Net Income = $8,153.33

Average Investment = $45,000 / 2
Average Investment = $22,500

Average Rate of Return = Average Net Income / Average Investment
Average Rate of Return = $8,153.33 / $22,500
Average Rate of Return = 36.24%