Use the information in the table below for the following 5 questions A capital i

Question

Use the information in the table below for the following 5 questions A capital investmsent project is estimated so have the folowing after-tax cash fhows, by year The company utilizes a discount ratc of 20% to evaluate capital projects. You have rounding errors in your calculations so choose the closest answer. Assume cash flows are received equally over the year 7) The NET PRESENT VALUE for the project shown above is: a) $4,789 b) -55,672 )$3,163 d) -$10.958 e) so 8) The INTERNAL RATE OF RETURN for the project shown above is: a) 3.92% b) 16.88% c) 14.27% d) 15.41% c) No IRR 9) The PROFITABILITY INDEX for the project shown above is: a) 0.93 b) 0.89 c) 1.60 d) 2.15 e) 0.78 10) The PAYBACK for the project shown above is: a) 2.16 b) 3.66 c) 3.15 d) 3.00 e) Does not pay back

Explanation / Answer

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

a.

NPV = -50000 + 15000/(1+0.2)^1 + 17500/(1+0.2)^2 + 17500/(1+0.2)^3 + 25000/(1+0.2)^4 = -$3163

b.

IRR is the rate at which NPV = 0

NPV = -50000 + 15000/(1+IRR)^1 + 17500/(1+IRR)^2 + 17500/(1+IRR)^3 + 25000/(1+IRR)^4 = 0

By trail and error, IRR = 16.88%

c.

Profitability Index:

PI = (NPV + Initial investment)/Initial investment = (-3163 + 50000)/50000 = 0.93

d.

Where,
   A = Last period with a negative cumulative cash flow;
   B = Absolute value of cumulative cash flow at the end of the period A;
   C = Cash flow during the period after A.

Paybakc period = 3 years

Payback Period = A + B C

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