(Part 1) Using a 5% discount rate, calculate the Net Present Value, Payback, Pro

Question

   (Part 1)
Using a 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= $500,000, Cash inflows of $100,000 for years 1-5 and $50,000 for years 6-10.

Project 2
Initial Invest= $1,000,000, 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= $800,000, 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. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Explanation / Answer

Payback period is when the net cumulative inflows exceed the initial outlay
PI = (Initial outlay + NPV)/initial outlay
NPV, IRR calculated unsing functions in excel

For Budget of 1200000, we can only choose one project, so we go with maximum NPV to maximize the dollar profit. Which is project 2. If you choose 3, you may earn higher rate of return but the money not invested, 400000 will earn 0 returns reducing the equivalent returns

For budget of 2000000, we can choose a maximum of 2 projects. We go with 2 and 3 as it will maximize the dollar profit as well as IRR.

I spent a lot of time doing this :)

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Project 1 Proj1 Inflows NPV Project 2 Proj2 Inflows NPV Project 3 Proj3 Inflows NPV Discount Rate 5% 5% 5% Initial Investment -500000 -1000000 -800000 Cash inflow year1 100000 95238 400000 380952 300000 285714 Cash inflow year2 100000 90703 400000 362812 300000 272109 Cash inflow year3 100000 86384 400000 345535 300000 259151 Cash inflow year4 100000 82270 0 0 300000 246811 Cash inflow year5 100000 78353 0 0 300000 235058 Cash inflow year6 50000 37311 0 0 0 0 Cash inflow year7 50000 35534 0 0 0 0 Cash inflow year8 50000 33842 250000 169210 0 0 Cash inflow year9 50000 32230 250000 161152 0 0 Cash inflow year10 50000 30696 250000 153478 100000 61391 NPV 102561 573140 560234 Payback 7 years 3 years 3 years Profitability Index 1.21 1.57 1.70 IRR 10% 20% 26%

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