Using a 4.4% discount rate, calculate the Net Present Value, Payback, Profitabil

Question

Using a 4.4% discount rate, calculate the Net Present Value, Payback, Profitability Index and IRR for each of the investment projects below (note, the inflows are for each year). Based on your calculations rank the projects and support you answer.

Project 3
Initial Invest= $840,000, Cash inflows of $300,000 for years 1-5, $0 for years 6-9 and $100,000 for year 10.

(Part 2)
Assuming a budget of $1,200,000 what are your recommendations for the three projects in the above problem. Explain.

Assuming a budget of $2,000,000 what are your recommendations for the above problem? Explain.

Explanation / Answer

Calculation of Net present Value Project 3 Year Amount $ P.V @ 4.4% Total P.V 0 -840,000 1 -840000 1 300,000 0.958 287400 2 300,000 0.9178 275340 3 300,000 0.879 263700 4 300,000 0.8422 252660 5 300,000 0.8068 242040 6 0 0.7724 0 7 0 0.7404 0 8 0 0.7384 0 9 0 0.6798 0 10 100,000 0.6512 65120 Total NPV 546260 Calculation of Pay Back period Project 3 Year Cash Inflows Cumulative Cash flows 1 300,000 300,000 2 300,000 600,000 3 300,000 900,000 4 300,000 1,200,000 5 300,000 1,500,000 6 0 1,500,000 7 0 1,500,000 8 0 1,500,000 9 0 1,500,000 10 100,000 1,600,000 Pay Back Period = 2nd Year + Total cash outflow - Cummulative cash inflow in 2nd Year Cash Inflow in 3rd Year 2nd year+   $840,000 - $600,000 $300,000 2nd Year                        + 0.8000 2.80 Years Calculation of Profitability Index Project 3 Profitability Index         = Present Value of Cash Inflows Present Value of cash Outflows 1386260 840,000 1.65 Calculation of IRR Project 1 Year Amount $ 0 -505,000 1 105,000 2 105,000 3 105,000 4 105,000 5 105,000 6 50,000 7 50,000 8 50,000 9 50,000 10 50,000 Average annual cash inflow = 775,000 10 $77,500 Fake payback period = Cash outflow                                        Average annual cash inflow 505,000 $77,500 6.5161 By Solving through Calculator IRR = 10.59% IRR 10.59% Project 2 Year Amount $ 0 -1,100,000 1 420,000 2 420,000 3 420,000 4 0 5 0 6 0 7 0 8 250,000 9 250,000 10 250,000 Average annual cash inflow = 2,010,000 10 $201,000 Fake payback period = Cash outflow                                        Average annual cash inflow 1,100,000 $201,000 5.4726 By Solving through Calculator IRR = 7.82% IRR 17.42% Project 3 Year Amount $ 0 -840,000 1 300,000 2 300,000 3 300,000 4 300,000 5 300,000 6 0 7 0 8 0 9 0 10 100,000 Average annual cash inflow = 1,600,000 10 $160,000 Fake payback period = Cash outflow                                        Average annual cash inflow 840,000 $160,000 5.2500 By Solving through Calculator IRR = 23.74% IRR 23.74% Based on your calulations rank the projects and support your answer. NPV Project 2 has highest NPV . Pay Back period Project 2 has lowest payback period Profitability Index Project 3 has highest profitability Index IRR Project 3 has highest IRR Part 2 Assuming a budget of $1,200,000 what are your recommendations for the three projects in the above problem. Explai When the budget is limited we can't spend more than the budget .Therefore we will invest in project 2 only because if we invest in project 1 and project 3 then our budget exceeds. Therfore only investment has to be made in project 2 .It also has highest NPV and money is also backed earlier than any other project. Assuming a budget of $2,000,000 what are your recommendations for the above problem. Explain. If the budget is $2,000,000 then either we invest money in project 2 and project 3 because by investing our money in project 2 and Project 3 we get the higher NPV and the pay back period is also less in projects 3 . Moreover the project 3 has higher IRR . Also the profitability index of project 3 is higher. Therefore I would recommend project 3 and project 2 when the budget was $2,000,000

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