4 Investment Outlay 5 Equipment cos 6 Shipping and installation 7 Increase in in

Question

4 Investment Outlay 5 Equipment cos 6 Shipping and installation 7 Increase in inventory 8 Increase in accounts payable 9 Total initial investment 10 11 Operating Cash Flows 12 Unit sales 13 Price per unit 14 Total revenues 15 Operating costs (wo depreciation) 16 Depreciation 17 Total costs 8 Operating income 19 Taxes on operating ncome 20 After-tax operating income 21 2 Operating cash flow 23 24 Terminal Year Cash Flows 25 Changes in net working capital 26 Salvage value 27 Tax on salvage value 28 Total termination cash flow 29 Project Cash Flows 30 Net cash flows 55,000 100,000 52 $2 $ 200,000 200,000 200,000 200,000 120,000 90,000 120,000 30,000 66,000 5 186,000 $ 210,000 150,000 134,000 $14,000(10,000) 50,000 66,000 26.400 8,400 (6,000) 30,00039,600 5,600 4,000) 20,000 74400 $ 84,000 60,00053,600 S 25,000 10,000 ($260,000) $74,400 584,000 60,000 53,600 32 Required return (used as the discount rate) 272,000.00 The project should be accepted because the break even point hits during the the 4 year paybackperiod 34 Payback periad 35 36 Present value of cash inflows 37 Present value of cash outflows 38 Profitability index 39 40 Internal rate of return (IRR) 41 42 Net present value (NPV 74,400.00 84,000.0060,000.00 53,600.00

Explanation / Answer

Since an image of a worksheet has been provided with a lot of information, I presume the required questions are calculation of Profitability Index(PI), IRR and NPV. I have also used a worksheet to solve them as follows:

Notes:

1. To calculate df, we used function power where df=power(1/1+rate,years)

2. Initial investment is an outflow so it has been shown as negative inflow.

3. Project should not be accepted on the basis of above calculations because:

a) PI=PV of inflows/PV of outflows=0.84 which is less than 1.

b) IRR=function IRR(range of cash flows)=1.96% which is much less than required return.

c) NPV=PV of inflows-initial investment=-$41253.74

1 2 3 4=2*3 year operating cash flow($) df @ 10% pv($) 0 -260000 1.0000 -260000 1 74400 0.9091 67636.36 2 84000 0.8264 69421.49 3 60000 0.7513 45078.89 4 53600 0.6830 36609.52 pv of inflows $218746.26 pi -0.84 irr 1.96% npv -$41253.74

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