(Part 1) Using a 4.4% discount rate, calculate the Net Present Value, Payback, P

Question

(Part 1)
Using a 4.4% 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= $505,000, Cash inflows of $105,000 for years 1-5 and $50,000 for years 6-10

Project 2
Initial Invest= $1,100,000, Cash inflows of $420,000 for years 1-3, $0 for years 4-7 and $250,000 for years 8-10.

Project 3
Initial Invest= $840,000, 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.

I ONLY NEED PROJECT 3 AND PART 2 ANSWERED IN THIS POST!! THANK YOU :)

Explanation / Answer

Answer: Discount rate = 4.40% Project-1 Year Cash flows 0 ($505,000) 1 $105,000 2 $105,000 3 $105,000 4 $105,000 5 $105,000 6 $50,000 7 $50,000 8 $50,000 9 $50,000 10 $50,000 Therefore NPV of this project-1 at 4.4% = $134,711.41 IRR of project-1 = 10.59% Project-2 Year Cash flows 0 ($1,100,000) 1 $420,000 2 $420,000 3 $420,000 4 $0 5 $0 6 $0 7 $0 8 $250,000 9 $250,000 10 $250,000 Therefore NPV of this project-1 at 4.4% = $910,000.00 IRR of project-1 = 17.42% Project-3 Year Cash flows 0 ($840,000) 1 $300,000 2 $300,000 3 $300,000 4 $300,000 5 $300,000 6 $0 7 $0 8 $0 9 $0 10 $100,000 Therefore NPV of this project-1 at 4.4% = $760,000.00 IRR of project-1 = 23.74% PART-2 If the budget is $1,200,000 then my recommendation is to select the project-2 only as its IRR is higher than the project-1 and also NPV of project-2 is highest which means it would add maximum to the current wealth of the shareholders. If the budget is $2,000,000 then my recommendation is to select the project-2 and project -3 as both the projects are affordable and their returns are also maximum.

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