Suppose you have a project with the following cash flows and 10% required return

Question

Suppose you have a project with the following cash flows and 10% required return.

What is the NPV of this project? 1847.36; 1687.52; 2420.44; or 2836.45

What is the IRR of this project? 26.44%; 18.63%; 21.36%; or 22.85%

What is the PI of this project? 1.58; 1.48; 1.38; or 1.28

What is the MIRR of this project? 18.49%; 29.54%; 15.87%; or 22.65%

What is the payback of this project? 2.53 yrs; 4 yrs; 2.89 yrs; or 3.33 yrs

What is the discounted payback of this project? 4.79 yrs; 3.73 yrs; 4.18 yrs; or 3.33 yrs

Any hints/suggestions are welcome.

Thank you!!! :)

Year Cash Flow 0 -5000 1 2500 2 2500 3 -500 4 3000 5 3000

Explanation / Answer

NPV of the project

$2,420.44

IRR of the Project :

IRR is the rate at which NPV is equal to 0. Calculating NPV using trial and error method at 26% and 27%.

NPV at 26% is:

NPV at 27%

Interpolating between 26% and 27% IRR = 26%+46.95/(46.95+58.05) =26%+.447 =26.447%

Hence answer is Option B.

PI of the Project:

Profitability index = PV of cash inflows/PV of cash out flows.

= 7796.10/5375.66 = 1.45 .

Answer is Option A. It must be a typo error as the computation here is resulting as 1.45 and nearest answer given in the options is 1.48

MIRR:

MIRR cannot be calculated as reinvestment rate is not provided.

Payback period for the project:

Payback period is the time taken to recover the investment.

Accumulated cash flows till year Year 3 = $4,000

Cash flow required to meet project investment = $5,000

Cash flows received during year 4 = $3,000

Required cash flow to meet $ 5, 000 = $5, 000- $4,000 = $1,000

No of months required to generate $1000 = (12/3000)*1000 = 4 months.

Hence payback period = 3.4 years.

Discounted Payback period:

Discounted payback period for this project is 3+(12/$2049.04/)* ($5,000-$3,508.64) = 3Years + 8.73 months = 3.87 months.

Year Cash flow Discounted at 10% Discounted cash flows 0 -$5,000.00 1 -$5,000.00 1 $2,000.00 0.909090909 $1,818.18 2 $2,500.00 0.826446281 $2,066.12 3 -$500.00 0.751314801 -$375.66 4 $3,000.00 0.683013455 $2,049.04 5 $3,000.00 0.620921323 $1,862.76 NPV

$2,420.44

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