Question

Your company is considering an expansion into a new product line. The project cash flows are as follows:

Year	Project A
0	-$60,000
1	44,000
2	20,000
3	14,000

The required return for this project is 10%.

A.) What is the NPV for the project?

B.) What is IRR for the project?

C.) What is the payback period for the project?

D. What is the Profitability Index (PI) for the project?

Answer 1

(A) Calculation of NPV

                        NPV = - $ 60000 + ( $44000 x 0.909 ) + ( $ 20000 x 0.826 ) + ($ 14000 x 0.751 )

                                = - $ 60000 + $ 39996 + $ 16520 + $ 10514

        NPV = + $ 7030

(B) Calculation of IRR

1. Determine the NPV at 10% = + $ 7030

2.Determine the NPV at Higher rate, Say 20%

            NPV = - $ 60000 + ( $44000 x 0.833 ) + ( $ 20000 x 0.694 ) + ($ 14000 x 0.578 )

                     = - $ 1236

            Therefore IRR = R1 + NPV1(R2-R1)

                                                NPV1-NPV2

                                    = 10% + $ 7030 (20%-10%)

                                                   $ 7030 + 1236

                        IRR = 10% + 8.5%

                                = 18.50 %

            © Calculation of Payback Period

Year	Cashflow	Cumilative Cashflow
1	$ 44000	$ 44000
2	$ 20000	$ 64000
3	$ 14000	$ 78000

Payback Period = Years before full recover + (Unrecovered cashflow at start of the year/cash   

                               flow during the year )

                        = 1 Year + ( $ 16000 / $ 20000 )

                        = 1 Year + 0.8 Year

                        = 1.80 Years

(D) Calculation of Profitability Index (PI)

Profitability Index = Present value of cash flow / Total Investment

                                    = $ 67030 / $ 60000

                        PI        = 1.12