Question

You will be evaluating three projects for Hasbro Toys. Hasbro's cost of capital or discount rate is 10%. The first project (A) will cost $25,000 initially. The project will then return cash flows of $8,000 for 4 years. The second project (B) will cost $40,000 initially. The project will then return cash flows of $15,000 for the next 2 years and $10,000 for 2 years after that. The third project (C) will cost $30,000 initially. The project will then return cash flows of $12,000 for 3 years

What is Projects C's NPV, IRR, Payback Period, and PI? Show step by step and circle final answer.

Answer 1

Project A

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$25,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 10%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 10% discount rate is $358.92

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$25,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 10.66%.

Payback Period

Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

Payback period= 3 years + 1,000/ 8,000

                         = 3 years + 0.1250

                         = 3.1250 years.

Profitability Index= PV of future cash flows/Initial investment

PV of future cash flows is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$25,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The present value of cash flows is $358.92

Profitability Index= $358.92/ $25,000= 0.0144.

Project B

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$40,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 10%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 10% discount rate is $376.34.

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$40,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 10.47%.

Payback Period

Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

Payback period= $15,000 + $15,000 + $10,000= $40,000.

The payback period is 3 years.

Profitability Index= PV of future cash flows/Initial investment

PV of future cash flows is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$40,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The present value of cash flows is $376.34

Profitability Index= $376.34/ $40,000= 0.0094.

Project C

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$30,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 10%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 10% discount rate is -$157.78.

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$30,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 9.70%.

Payback Period

Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

Project A

Payback period= 2 years + $6,000/ $12,000

                              = 2 years + 0.50

                              = 2.50 years.

Profitability Index= PV of future cash flows/Initial investment

PV of future cash flows is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$30,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The present value of cash flows is -$157.78.

Profitability Index= -$157.78/ $30,000= -0.0053.

In case of any query, kindly comment on the solution.