You are analyzing a project and have prepared the following data: Year Cash Flow

ID: 2700012 • Letter: Y

Question

You are analyzing a project and have prepared the following data:

Year Cash Flow

0 -$ 169,000

1 $ 46,200

2 $ 87,300

3 $ 41,000

4 $ 39,000

Required Payback period is 2.5 Years

Required Return 8.50%

1. What is the profitability index for this project? Should you accept the project?

2. What is the Internal Rate of Return for this project? Should you accept or reject the project?

3. What is the Net Present Value for this project? Should you accept or reject the project?

4. What is the Payback Period for this project? Should you accept or reject the project?

PLEASE SHOW ALL WORK!!!!

1. PV Index is ratio of the present value of Futuer CFs to Initial investment

So PV of CFs = 46200/(1+8.5%)^1 + 87300/(1+8.5%)^2+41000/(1+8.5%)^3 + 39000/(1+8.5%)^4 = $176,978.72

SO PI Index = $176,978.72/169000 = 1.05

2. IRR = IRR(CF0..CF4)

= IRR(-169000,46200,87300,41000,39000)

= 10.75%

As IRR is more than Reqd return 8.5%, Project should be accepted.

3. NPV = PV of CFs + CF0 = $176,978.72 - 169,000 = $7,978.72

As NPV is Positive, Project should be accepted

4. Paypabck period:Cash PBP = Payback period (PBP) = Year before full recovery + (Unrecovered cost at start of year/Cash flow during year)

We see that CFs in 2 yrs =46200+87300 =133500

CF in Y3 = 41000. But Cumuulative CFs from Y1 to Y3 is more than Initial Inv. So our PBP is between 2 & 3 yrs.

SO PBP = 2 + (169000-133500)/41000 = 2.87 years

As PBP is more than Reqd PBP of 2.5Yrs, We shouldn't accept project

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