(Part 1) Using a 4.5% discount rate, calculate the Net Present Value, Payback, P

Question

(Part 1) Using a 4.5% 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 1 Initial Invest= $490,000, Cash inflows of $100,000 for years 1-5 and $50,000 for years 6-10. Project 2 Initial Invest= $970,000, Cash inflows of $400,000 for years 1-3, $0 for years 4-7 and $250,000 for years 8-10. Project 3 Initial Invest= $820,000, 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 $1,100,000 what are your recommendations for the three projects in the above problem. Explain. Assuming a budget of $2,200,000 what are your recommendations for the above problem? Explain.

Explanation / Answer

Project 1 NPV = -490,000 + (438,998 + 176137) = 125,135 PI = (438,998 + 176137)/490000 = 1.255 Project 2 NPV = -970,000 + (1099746 + 505078) = 634,824 PI = 1.654 Project 3 NPV = -820,000 + ( 1,316,994 + 64392) = 561,387 PI = 1.6846 (Part 2) As we can see that NPV is highest for project 2 but it also has high initial investment. So for initial money of 1,100,000 I think project 3 is best as it has highest PI value and less initial investment as compared to project 2. IF initial money is large enough like 2.200,000 then project 2 is undoubtedly the best option. Even for 1,100,000 we can adopt project 2 but it depend on the user what he can think

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

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