Answer the following questions and put calculations: 12. Use the following infor

Question

Answer the following questions and put calculations:

12. Use the following information for the next four questions. Norlin Corporation is considering an expansion project that will begin next year (Time 0). Norlin's cost of capital is 12%. The initial cost of the project will be $250,000, and it is expected to generate the following cash flows over its five-year life:

Year

$

1

$40,000

2

$60,000

3

$90,000

4

$90,000

5

$90,000

a) What is the payback period for the expansion project?

i)3.67 years

ii)4.00 years

iii)4.25 years

iv)4.67 years

v)5.00 years

b) What is the net present value (NPV) of for the expansion project?

i)($45,197)

ii)$5,871

iii)$13,784

iv)$25,726

v)$120,000

c) What is the internal rate of return (IRR) for the expansion project?

i)4.13%

ii)6.50%

iii)10.36%

iv)12.83%

v)14.67%

d) What is the Profitability Index (PI) for the expansion project?

i)1.02

ii)1.05

iii)1.10

iv)1.48

v)Cannot be determined

Year

$

1

$40,000

2

$60,000

3

$90,000

4

$90,000

5

$90,000

Explanation / Answer

Year 0 1 2 3 4 5 Initial Investment 250000 Cash flows 40000 60000 90000 90000 90000 Cost of capital 12% 1 Payback calculations Cummulative cash flows 40000 100000 190000 280000 370000 So as we can see payback will be somewhere between year 3 and 4 payback 3.67 Years Basis values 190000 and 280000, 250000 will lie at 3.67 years 2 NPV 5,871.18 Using NPV formula and 12% are rate in it, with all the cashflow values 3 Net cash flows -250000 40000 60000 90000 90000 90000 IRR 13% Using IRR formula and initial investment will be negetive as it is an outflow 4 Profitability index 1.48 Sum of all the cash flows/Initial investment

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