You are considering a project with an initial cash outlay of $80,000 and expecte

Question

You are considering a project with an initial cash outlay of $80,000 and expected free cash flow of $20,000 at the end of each year for 6 years. The required rate of return for this project is 10 percent. What is the project's payback period? What is the project's NPV? What is the project's PI? What is the project's IRR? What is the project's MIRR? The D. Dorner Farms Corporation is considering purchasing one of two fertilizer-herbcides for the upcoming year. The more expensive of the two is better and will produce a higher yield. Assume these projects are mutually exclusive and that the required rate of return is 10 percent. Given the Calculate the NPV of each project. Calculate the PI of each project. Calculate the IRR of each project. If there is no capital rationing constraint, which project should be selected?

Explanation / Answer

ANSWER 1

a PAY BACK PERIOD => 80000 /20000 => 4 YEARS

b NPV => (20000 * PVIAF, 10% @ 6 YEARS)- 80000

=> (20000 * 4.355) - 80000 => 87100 -80000

NPV = $ 7100

c PROJECT PI => 87100 / 80000 => 1.09 TIMES

d PROJECT IRR

IRR => 12.98%

ANSWER 2

NPV OF A => 700*0.909 - 500 => $136.3

NPV OF B => 6000*0.909 - 5000 => $454

b

PI OF A=> 636.6/500=> 1.27 TIMES

PI OF B=> 5454/5000 => 1.09 TIMES

c

IRR OF A => 40%

IRR OF B=> 20%

d

ON NPV BASIS WE WILL SELECT PROJEST B AS NPV OF PROJECT B IS HIGHER, AND ON PI BASIS WE WILL SELECT PROJECT A AS PI OF PROJECT A IS HIGHER AN DIRR OF PROJECT A IS HIGHGER, SO IN ALL ITS BETTER TO SELECT PROJECT A.

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