Question

The following are cash flows for a prospective project. Use this information for the next few problems

Year	Cash Flow
0	-132,000
1	97,000
2	42,000
3	28,000

A. what is the payback period for the project?

B. If the appropriate discount rate for this project is 10%, what is the projects net present value?

C. If the appropriate discount rate for this project is 10%, what is the profitability index?

D. An argument against accepting the project is that it's internal rate of return is only 7%. Is this a valid argument? why or why not?

Answer 1

A

Year	Cash flow stream	Cumulative cash flow
0	-132000	-132000
1	97000	-35000
2	42000	7000
3	28000	35000

Payback period is the time by which undiscounted cashflow cover the intial investment outlay

this is happening between year 1 and 2

therefore by interpolation payback period = 1 + (0-(-35000))/(7000-(-35000))

1.83 Years

b

Discount rate	10.000%
Year	0	1	2	3
Cash flow stream	-132000	97000	42000	28000
Discounting factor	1.000	1.100	1.210	1.331
Discounted cash flows project	-132000.000	88181.818	34710.744	21036.814
NPV = Sum of discounted cash flows
NPV Project =	11929.38
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
C
PI= (NPV+initial inv.)/initial inv.
=(11929.38+132000)/132000
1.09

D.

IRR has to be compare with the cost of capital of the company then only a valid decision be , it cannoth be used in standalone