Problems 1 to 7 A proposed project requiring an initial outlay of $340,000 will

Question

Problems 1 to 7 A proposed project requiring an initial outlay of $340,000 will provide the following year-end cash flows (remember that the initial outlay and year 3 are negative cash flows)

Year 1 2 3 4 5 6

Cash flows $140,000 $211,000 -$440,000 $195,000 $321,000 $315,000

1.     Using a 6% required return, please compute the net present value______________. Is the investment desirable?       

2.     Using a 6% required return, please compute the profitability index for the above investment__________________.

3.     Using a 6% required return, please compute the modified profitability index for the above investment__________________.

4.     Please compute the internal rate of return for the above investment __________________.

5.     Using a 6% required return, please compute the modified internal rate of return for the above investment (using the method described in the text

Explanation / Answer

1).

NPV is net present value of all future cash flow, including the initial investment discounting a required rate

NPV = -340,000+(140,000/1.06^1)+(211,000/1.06^2)-(440,000/1.06^3)+(195,000/1.06^4)+(321,000/1.06^5)+(315,000/1.06^6)

NPV = $226822.94

2).

Prefitability index = PV of all future cash flow/initial investment

PV of all future cashflow = NPV+initial investment = $226822.94+340,000 = $566822.94

Profitability index = 566822.94/340,000 = 1.67

3).

Modified Profitability Index = PV of all positive cash flow/PV of all negative cash flow = 936255.43/(340,000+369432.48) = 1.3197

4).

IRR is thatt rate of retun at which NPV = 0

0 = -340,000+(140,000/(1+IRR)^1)+(211,000/(1+IRR)^2)-(440,000/(1+IRR)^3)+(195,000/(1+IRR)^4)+(321,000/(1+IRR)^5)+(315,000/(1+IRR)^6)

by calculator, IRR = 19.734%

5).

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.