The CS Hightech is planning new investment project which is expected to yield ca
ID: 2635151 • Letter: T
Question
The CS Hightech is planning new investment project which is expected to yield cash inflows of $335,000 per year in Years1 through 5, $266,000 per year in Years 6 though 9, and $218,000 in Years 10 through 15. This investment will cost the company $2,500,000 today (initial outlay). We assume that the firms cost of capital is 8.5% Question 1: Draw a time line to show the cash flows of the project. Question 2: Compute the projects payback period, net present value (NVP), profitablility Index (PI), internal rate of return (IRR), and modified internal rate of return (MIRR). Question 3: Discuss whether the project should be taken
PLEASE SHOW ALL STEPS, Thank you.
Explanation / Answer
2)
payback period = 8 + 270000/266000 = 8.10
PV of cash flows = 335000/1.085 + 335000/1.085^2 + 335000/1.085^3 + 335000/1.085^4 + 335000/1.085^5 + 266000/1.085^6 + 266000/1.085^7 + 266000/1.085^8 + 266000/1.085^9 + 218000/1.085^10 + 218000/1.085^11 + 218000/1.085^12 + 218000/1.085^13 + 218000/1.085^14 + 218000/1.085^15
= 2375942.88385
NPV = -2500000 + 2375942.88385 = -124057.12
PI = 2375942.88385/2500000 = 0.95
IRR =7.57%
MIRR = (2375942.88385/2500000)^(1/15) - 1 = -0.34%
3)
project should not be taken
since
NPV is negative
IRR< cost of capital
PI <1
MIRR is negative