2. An investment project costs $10,000 and has annual cash flows of $2,850 for s
ID: 2651788 • Letter: 2
Question
2.
An investment project costs $10,000 and has annual cash flows of $2,850 for six years.
What is the discounted payback period if the discount rate is zero percent? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))
What is the discounted payback period if the discount rate is 5 percent? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))
What is the discounted payback period if the discount rate is 19 percent? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16)
years
3.
You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.4 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,894,300, $1,947,600, $1,916,000, and $1,369,500 over these four years, what is the project’s average accounting return (AAR)? (Round your answer to 2 decimal places. (e.g., 32.16))
4.
A project that provides annual cash flows of $17,400 for ten years costs $80,000 today.
What is the NPV for the project if the required return is 9 percent? (Round your answer to 2 decimal places. (e.g., 32.16))
At a required return of 9 percent, should the firm accept this project?
What is the NPV for the project if the required return is 21 percent? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))
At a required return of 21 percent, should the firm accept this project?
At what discount rate would you be indifferent between accepting the project and rejecting it? (Round your answer to 2 decimal places. (e.g., 32.16))
5.
What is the IRR of the following set of cash flows? (Round your answer to 2 decimal places. (e.g., 32.16))
6. Garage, Inc., has identified the following two mutually exclusive projects:
What is the IRR for each of these projects? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Using the IRR decision rule, which project should the company accept?
If the required return is 12 percent, what is the NPV for each of these projects? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
At what discount rate would the company be indifferent between these two projects? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)
7.Consider the following two mutually exclusive projects:
What is the payback period for each project? (Round your answers to 2 decimal places. (e.g., 32.16))
What is the discounted payback period for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
What is the NPV for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
What is the IRR for each project? (Round your answers to 2 decimal places. (e.g., 32.16))
What is the profitability index for each project? (Do not round intermediate calculations and round your final answers to 3 decimal places. (e.g., 32.161))
Project A
8.
An investment under consideration has a payback of eight years and a cost of $865,900. Assume the cash flows are conventional.
9.
This problem is useful for testing the ability of financial calculators and computer software. Consider the above cash flows. The IRRs, from smallest to largest, are percent, percent, percent, and percent. (Hint: search between 20 percent and 70 percent.) (Round your answers to 2 decimal places. (e.g., 32.16))
What is the discounted payback period if the discount rate is zero percent? (Enter 0 if the project never pays back. Round your answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Answer Q2. Initial Cost 10000 Annual Cash flows 2850 Payback period 3.51 year. (Initial cost/annual cash inflows) So, at 0% rate Payback period is 3.51 years at 5% Present Pay back No of Year Year Cashflows PV factor Value Amount 1 2850 0.94340 2688.68 2688.68 1 2 2850 0.89000 2536.49 2536.49 1 3 2850 0.83962 2392.91 2392.91 1 4 2850 0.79209 2257.47 2257.47 1 5 2850 0.74726 2129.69 124.4490038 0.06 6 2850 0.70496 2009.14 Total 17100 14014.37433 10000 4.06 So, at 5% rate Payback period is 4.06 years at 19% Present Pay back No of Year Year Cashflows PV factor Value Amount 1 2850 0.52632 1500.00 1500.00 1 2 2850 0.27701 789.47 789.47 1 3 2850 0.14579 415.51 415.51 1 4 2850 0.07673 218.69 218.69 1 5 2850 0.04039 115.10 115.10 1 6 2850 0.02126 60.58 60.58 1 17100 3099.36 3099.36 6 So, at 19% rate Project is unable to return back the initial investment. Answer 3. Year Net Income 1 1894300 2 1947600 3 1916000 4 1369500 Total 7127400 Average Income (7,127,400/4) 1781850 Average Rate of Return (1,781,850/12,400,000) 14.37% Answer 4. PV Factor Present PV Factor Present Year Cash Flows 9% Value 21% Value 0 -80000 1.000000 -80000 1.000000 -80000 1 17400 0.917431 15963.30275 0.826446 14380.16529 2 17400 0.841680 14645.23188 0.683013 11884.43412 3 17400 0.772183 13435.99255 0.564474 9821.846383 4 17400 0.708425 12326.59867 0.466507 8117.228416 5 17400 0.649931 11308.80612 0.385543 6708.453236 6 17400 0.596267 10375.05149 0.318631 5544.176228 7 17400 0.547034 9518.39586 0.263331 4581.963825 8 17400 0.501866 8732.473266 0.217629 3786.746963 9 17400 0.460428 8011.443364 0.179859 3129.542944 10 17400 0.422411 7349.94804 0.148644 2586.399128 Total 94000 31667.244 -9459.043465 At 9 % NPV = 31,667.24 Project should be accepted At 21 % NPV = -9459.04 Project should not be accepted Answer 5. Present Value at:- Year Cash flow 15% 16.00% 17.00% 17.87% 18.00% 19.00% 0 -16500 -16500 -16500 -16500 -16500 -16500 -16500 1 7200 6260.8696 6206.896552 6153.846154 6108.217249 6101.69492 6050.420168 2 8500 6427.2212 6316.884661 6209.365184 6117.625437 6104.56765 6002.40096 3 7000 4602.6136 4484.603715 4370.593895 4274.09308 4260.41611 4153.910699 Total 6200 790.70436 508.3849276 233.8052326 -0.064233507 -33.321323 -293.2681723 IRR is 17.87% at which NPR is zero. Answer 7. Project A Project B Payback Payback Year Cashflow Amount Year Cashflow Amount Year 0 -345000 -345000 -48000 -48000 1 50000 50000 1 24500 24500 1 2 70000 70000 1 22500 22500 1 3 70000 70000 1 20000 1000 0.05 4 445000 155000 0.35 15100 Total 290000 0 3.35 34100 0 2.05 Answer a-1 Project A 3.35 years Project B 2.05 years Answer b-1 Project B as it returns its investment earlier than Project A Project A Project B Payback Payback Year Cashflow PV at 14% Amount Year Cashflow PV at 14% Amount Year 0 -345000 -345000 -345000 -48000 -48000 -48000 1 50000 43859.65 43859.64912 1 24500 21491.23 21491.23 1 2 70000 53862.73 53862.72699 1 22500 17313.02 17313.02 1 3 70000 47248.01 47248.00613 1 20000 13499.43 9195.75 0.68 4 445000 263475.72 200030 0.76 15100 8940.41 Total 290000 63446.106 0.382249869 3.76 34100 13244.08997 -0.00254 2.68 Discounted Payback period Project A 3.76 year Project B 2.68 year Answer b-2 Project B will be accepted. Answer c-1 NPV Project A 63446.106 Project B 13244.09 Answer c-2 Project A will be accepted. Answer d-1 Project A PV at:- Year Cashflow 18% 19.00% 20.00% 20.04% 21.00% 22.00% 0 -345000 -345000.00 -345000.00 -345000.00 -345000.00 -345000.00 -345000.00 1 50000 42372.88 42016.81 41666.67 41652.16 41322.31 40983.61 2 70000 50272.91 49431.54 48611.11 48577.26 47810.94 47030.37 3 70000 42604.16 41539.11 40509.26 40466.96 39513.18 38549.48 4 445000 229526.05 221907.59 214602.62 214303.87 207595.78 200872.59 Total 290000 19776.00 9895.05 389.66 0.25 -8757.78 -17563.95 Project B PV at:- Year Cashflow 26% 27.00% 28.00% 28.05% 29.00% 30.00% 0 -48000 -48000.00 -48000.00 -48000.00 -48000.00 -48000.00 -48000.00 1 24500 19444.44 19291.34 19140.63 19133.67 18992.25 18846.15 2 22500 14172.34 13950.03 13732.91 13722.94 13520.82 13313.61 3 20000 9998.12 9763.80 9536.74 9526.36 9316.67 9103.32 4 15100 5990.94 5804.46 5625.19 5617.02 5452.78 5286.93 Total 34100 1605.84 809.63 35.47 -0.01 -717.47 -1449.98 Answer d-1 IRR Project A 20.04% Project B 28.05% Answer d-2 Project B as it gives highest IRR.
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