1- A project has an initial cost of $69,175, expected net cash inflows of $9,000
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Question
1- A project has an initial cost of $69,175, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 14%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.
2-A project has an initial cost of $53,950, expected net cash inflows of $10,000 per year for 8 years, and a cost of capital of 13%. What is the project's payback period? Round your answer to two decimal places.
3-
The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $44 million on a large-scale, integrated plant that will provide an expected cash flow stream of $6 million per year for 20 years. Plan B calls for the expenditure of $14 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $2.7 million per year for 20 years. The firm's cost of capital is 9%.
Calculate each project's NPV. Round your answers to the nearest dollar.
Calculate each project's IRR. Round your answers to two decimal places.
Set up a Project by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant.
What is the NPV for this Project ? Round your answer to the nearest dollar.
$
What is the IRR for this Project ? Round your answer to two decimal places.
%
Explanation / Answer
1.
Profitability Index = (NPV + Initial cost)/Initial cost
NPV is calculated by discounting the cashflows
PV = C/(1+r)^n
C - Cashflow
r - Discount rate
n - years to the cashflow
NPV = -69175 + 9000/(1+0.14)^1 + 9000/(1+0.14)^2 + 9000/(1+0.14)^3 + 9000/(1+0.14)^4 + 9000/(1+0.14)^5 + 9000/(1+0.14)^6 + 9000/(1+0.14)^7 = -30580.26
PI = (-30580.26 + 69175)/69175 = 0.56
PI = 0.56
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