Question

1. Bulldog Memorabilia, a small screen printing firm, is considering investing in new technology that allows customers to design their own products online, then they are automatically printed and shipped with only minimal labor costs. The firm has projected the following cash flows

Time 0                   Time 1             Time 2             Time 3             Time 4             Time 5

-2,000,000             450,000            550,000            625,000            600,000            400,000

The firm anticipates selling the equipment for 300,000 (its salvage value) at time 5 and estimates the project cost of capital to be 10%. The firm estimates the IRR on the project to be 13.19%

1. Calculate the Net Present Value of the project (5 points)
2. Calculate the Payback Period (5points)
3. Calculate the Discounted Payback period for the project (5 points)
4. Calculate the profitability index for the project (5 points)
5. Will the NPV and IRR always provide the same accept / reject decision (is it possible for you to accept a project using NPV and reject it using IRR). Explain in detail (show why they will always agree or provide an example where they don’t) (5 points)
6. If you were comparing this project to another project and could only accept one of them, would it matter if you ranked the projects based upon their NPV or IRR? Explain in detail. (5 points)

Answer 1

a

Project
Discount rate	0.1
Year	0	1	2	3	4	5
Cash flow stream	-2000000	450000	550000	625000	600000	700000
Discounting factor	1	1.1	1.21	1.331	1.4641	1.61051
Discounted cash flows project	-2000000	409090.9	454545.5	469571.8	409808.07	434644.9
NPV = Sum of discounted cash flows
NPV Project =	177661.11
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
b
Project
Year	Cash flow stream	Cumulative cash flow
0	-2000000	-2000000
1	450000	-1550000
2	550000	-1000000
3	625000	-375000
4	600000	225000
5	700000	925000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-375000))/(225000-(-375000))
3.63 Years
c
Project			Discount rate=	0.1
Year	Cash flow stream	Cumulative cash flow	Discounting factor	Discounted CF	Cumulative cash flow	Cumulative discounted CF
0	-2000000	-2000000	1	-2000000	-2000000	-2000000
1	450000	-1550000	1.1	409090.9	-1550000	-1590909
2	55000000.00%	-1000000	1.21	454545.5	-1000000	-1136364
3	625000	-375000	1.331	469571.8	-375000	-666792
4	600000	225000	1.4641	409808.1	225000	-256984
5	700000	925000	1.61051	434644.9	925000	177661.1
Discounted payback period is the time by which discounted cashflow cover the intial investment outlay
this is happening between year 4 and 5
therefore by interpolation payback period = 4 + (0-(-256983.81))/(177661.11-(-256983.81))
4.59 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor
d
Project
PI= (NPV+initial inv.)/initial inv.
=(177661.11+2000000)/2000000
1.09

Please ask remaining parts seperately