In: Finance
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?
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