Consider the following cash flows: Year 0 1 2 3 4 5 6 Cash Flow -$5,000 $1,200 $

Question

Consider the following cash flows:
Year 0 1 2 3 4 5 6

Cash Flow -$5,000 $1,200 $2,400 $1,600 $1,600 $1,400 $1,200 A. Payback The company requires all projects to payback within 3 years. Calculate

the payback period. Should it be accepted or rejected?

B. Discounted Payback Calculate the discounted payback sing a discount rate of 8%. Should it be accepted or rejected?

Year 0 1 2 3 4 5 6 Cash Flow -$5,000 $1,200 $2,400 $1,600 $1,600 $1,400 $1,200

C. IRR Calculate the IRR for this project. Should it be accepted or rejected?

D. NPV Calculate the NPV for this project. Should it be accepted or rejected?

E. PI Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected?

The profitability Index is: NPV/Initial Cost

Explanation / Answer

A.

Since target payback = 3 years hence it should be accepted.

B.

Since target payback = 3 years hence it should be rejected.

C.

Since IRR is higher than discount rate hence project should be accepted.

D.  

Since NPV is greater than 0 Hence Project should be accepted.

E. Profitability index = NPV/Investment = 2323.92/ 5000 = 0.4648 or 46.48%

Since PI is greater than 0 Hence it should be accepted.

Best of Luck.God Bless

Year 0 1 2 3 4 5 6 Cash Flow -5000 1200 2400 1600 1600 1400 1200 Cumulative Cash Flow -5000 -3800 -1400 200 1800 3200 4400 PayBack Period 2.875 Payback Period = Year before cumulative cash flows turn positive + Cumulative Cash flow of year 2/Cash flow of year 3

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