There are 2 investment funds that you read about in the Wall Street Journal, and

Question

There are 2 investment funds that you read about in the Wall Street Journal, and you would like to evaluate their payback periods. Cloaks requires an initial investment of $1,949, while Daggers requires a $2855 initial investment. The following are the cash flows estimates: Year Cloaks Daggers 1 $200.00 $400.00 2 $400.00 $600.00 3 $600.00 $800.00 4 $800.00 $1,200.00 5 $800.00 $1,400.00 6 $800.00 $1,600.00 7 $800.00 $1,800.00 Assuming an 8% required rate of return, what is the discounted payback on Cloaks What is the profitability index for Daggers? Assume an 8% required return. What is the MIRR for each?

Explanation / Answer

discounted payback on Cloaks = Present value of inflow till cover outflow = 4 + (356.60 / 544.80) = 4.65 years

Profitability Index for Daggers = Present value of outflow / Present value of inflow = 5412.60 / 2855 = 1.896

MIRR: Cloaks = (future value inflow / present value outflow)1/n -1

=(5326.20 / 1949)1/7 - 1 = 1.154 - 1 = 0.154 or 15.40%

Daggers = (9277.22 / 2855)1/7 - 1 = 1.183 - 1 = 0.183 or 18.30%

year Cash flow Present value discount rate Present value Future value discount rate Future calculation rate Future Value Cloaks Daggers Cloaks Daggers Cloaks Daggers 0 1949 2855 1 1 200 400 0.926 185.2 370.4 1.087-1 1.5868 317.36 634.72 2 400 600 0.857 342.8 514.20 1.087-2 1.4693 587.72 881.58 3 600 800 0.794 476.40 635.20 1.087-3 1.3604 816.24 1088.32 4 800 1200 0.735 588 882.0 1.087-4 1.2597 1007.76 1511.64 5 800 1400 0.681 544.80 953.4 1.087-5 1.1664 933.12 1632.96 6 800 1600 0.630 1008 1.087-6 1.08 864 1728 7 800 1800 0.583 1049.40 (1.08)7-7 1 800 1800 Total 5412.6 5326.20 9277.22

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