Capital World Inc. is considering a project that has the following cash flow and

Question

Capital World Inc. is considering a project that has the following cash flow and WACC is 10.25%.

year

0

1

2

3

4

Cash flows

($1,400)

$450

$475

500%

$500

a. Calculate payback period?

b. Calculate discounted payback period?

c. Calculate NPV?

d. Calculate IRR?

e. Calculate MIRR?

f. Calculate PI?

Show work

year

0

1

2

3

4

Cash flows

($1,400)

$450

$475

500%

$500

a. Calculate payback period?

b. Calculate discounted payback period?

c. Calculate NPV?

d. Calculate IRR?

e. Calculate MIRR?

f. Calculate PI?

Show work

Explanation / Answer

a. Calculate payback period?

payback period = 2+ 475/500

payback period = 2.95 year

b. Calculate discounted payback period?

Discounted payback period = 3 + 227.95/338.42

Discounted payback period = 3.67 years

c. Calculate NPV?

NPV = - 1400 + 450/1.1025 + 475/1.1025^2 + 500/1.1025^3 + 500/1.1025^4

NPV = $ 110.47

d. Calculate IRR?

Using Equation & Trial & run method

At IRR, NPV = 0,

PV of cash Inflow = Pv of cash outflow

450/(1+r) + 475/(1+r) ^2 + 500/(1+r) ^3 + 500/(1+r) ^4 = 1400

r = 13.79%

Using Excel Formula

IRR = irr(value)

IRR = irr({-1400,450,475,500,500})

IRR = 13.79%

e. Calculate MIRR?

MIRR = (FV of cash Inflow/ Pv of cash outflow)^(1/n) - 1

FV of cash Inflow = 450*1.1025^3 + 475*1.1025^2 + 500*1.1025 + 500

FV of cash Inflow = 2231.66

Pv of cash outflow = 1400

MIRR = (2231.66/1400)^(1/4) - 1

MIRR = 12.36%

f. Calculate PI?

PI = 1 + NPV/Initial Outlay

PI = 1+ 110.47/1400

PI = 1.0789

Year Cash Flow Cumulative 0 -1400 -1400 1 450 -950 2 475 -475 3 500 25 4 500 525

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