Please only do question 2. (Parts a,b, and c) 1. Blackstone Co. is evaluating tw
ID: 2550249 • Letter: P
Question
Please only do question 2. (Parts a,b, and c) 1. Blackstone Co. is evaluating two The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows: projects. Project 1 is a project requiring a capital expenditure of $436,400. Year Net Cash Flow $145,000 148,000 95,000 60,000 $448.000 $ 45,000 74,000 84,500 $229.500 he company's minimum desired rate of return is 12%. The for 1, 2, 3, and 4 years is.893,.797, 712, and.636, respectively. present value of SI at compound interest of 12% Determine: (a) the average rate of return on investment, including the effect of depreciation on the investment, and (b) the net present value. 2. Blackstone's second project is a project that will require an initial investment of $325,000 and is expected to generate the following cash flows: Year 1 Year 2 Year 3 Year 4 Year 5 $60,000 $105,000 $110,000 $100,000 $70,000 A. What is the project's payback period? If the required rate of return is 20% and taxes are ignored, what is the project's net present value? The present value of $1 at compound interest of 20% for 1, 2, 3, 4 and 5 years is .8333, .6944, .5787, 4823 and 4019, respectively C. which Blackstone Project, 1 or 2 would you accept and why?Explanation / Answer
A) Project's payback period = Initial Investment/Average cash inflow
Average cash inflow = (Year 1+Year 2+Year 3+Year 4+Year 5)/No. of years
= ($60,000+$105,000+$110,000+$100,000+$70,000)/5 yrs
= $445,000/5 yrs = $89,000
Project's Payback period = $325,000/$89,000 = 3.65 years
B) Calculation of Net Present Value (Amounts in $)
Net Present Value = PV of cash inflows - Initial Investment
= $262,930 - $325,000 = ($62,070)
C) As the net present value of project 2 is more than project 1, project 2 should be accepted.
Year Cash Infows (1) PVF@20% (2) Present Value of Cash inflows (1*2) Year 1 60,000 0.8333 49,998 Year 2 105,000 0.6944 72,912 Year 3 110,000 0.5787 63,657 Year 4 100,000 0.4823 48,230 Year 5 70,000 0.4019 28,133 Total 262,930