Question
In: Finance
You are the CFO of XYZ Co. that prints textbook using an outdated system.
(Chapter 5. Long-Answer). Please use the following information to answer questions 12 to 19.
You are the CFO of XYZ Co. that prints textbook using an outdated system. The owner provides you with the following information about a new super modification project "Alpha" that will last for years. The project requires a new machine that costs $100,000 today. The project will not generate any cash flow at time 1. In years 2 and 3, the annual cash flows is $25,000. In years 4 and 5 the annual cash flow is $30,000, in year 6 it is $10,000, and in year 7 it is $60,000. The required rate of return is 6 percent. Credit for questions (12) to (17) will only be given if you provide numerical support for your decision.
what is discounted pay back period
what is Npv
what is pi ratio
what is irr
Solutions
Expert Solution
a). Calculating the Discounted Payback Period:-
| Year | Cash Flows of Project ($) | PV Factor @6.00% | Present Value of Project ($) | Cummulative Discounted Cash Flows of Project ($) |
| 0 | (100,000.00) | 1.0000 | (100,000.00) | (100,000.00) |
| 1 | - | 0.9434 | - | (100,000.00) |
| 2 | 25,000.00 | 0.8900 | 22,249.91 | (77,750.09) |
| 3 | 25,000.00 | 0.8396 | 20,990.48 | (56,759.61) |
| 4 | 30,000.00 | 0.7921 | 23,762.81 | (32,996.80) |
| 5 | 30,000.00 | 0.7473 | 22,417.75 | (10,579.05) |
| 6 | (10,000.00) | 0.7050 | (7,049.61) | (17,628.66) |
| 7 | 60,000.00 | 0.6651 | 39,903.43 | 22,274.77 |
| 60,000.00 | 22,274.77 |
- Discounted Payback Period = Years before the Discounted Payback period occurs + (Cummulative cash flow in the year before recovery/Discounted Cash flow in the year before recovery)
= 6 years + [(17,628.66/39,903.43)*12 months]
= 6 years & 5 months
b). Calculating the NPV of the Project:-
| Year | Cash Flows of Project ($) | PV Factor @6.00% | Present Value of Project ($) |
| 0 | (100,000.00) | 1.0000 | (100,000.00) |
| 1 | - | 0.9434 | - |
| 2 | 25,000.00 | 0.8900 | 22,249.91 |
| 3 | 25,000.00 | 0.8396 | 20,990.48 |
| 4 | 30,000.00 | 0.7921 | 23,762.81 |
| 5 | 30,000.00 | 0.7473 | 22,417.75 |
| 6 | (10,000.00) | 0.7050 | (7,049.61) |
| 7 | 60,000.00 | 0.6651 | 39,903.43 |
| 60,000.00 | 22,274.77 |
So, NPV of the Project is $22,274.77
c). Profitability Index ratio = (NPV/Initial Cost) + 1
=($22,274.77/$100,000) + 1
= 1.22 times
d). Calculating the IRR using the IRR function formula of Excel.:-
jeff jeffy answered 2 years agoRelated Solutions
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