Part 1, Using a 4.5% discount rate, calculate the Net Present Value, Payback, Pr
ID: 2702367 • Letter: P
Question
Part 1,
Using a 4.5% discount rate, calculate the Net Present Value, Payback, Profitability Index, and IRR for each of the investment projects below (note, the inflows are for each year). Based on your calculations rank the projects and support you answer.
Project 1) Initial Invest= $490,000, Cash inflows of $100,000 for years 1-5 and $50,000 for years 6-10.
Project 2) Initial Invest= $970,000, Cash inflows of $400,000 for years 1-3, $0 for years 4-7 and $250,000 for years 8-10.
Project 3) Initial Invest= $820,000, Cash inflows of $300,000 for years 1-5, $0 for years 6-9 and $100,000 for year 10.
Part 2,
Assuming a budget of $1,100,000 what are your recommendations for the three projects in the above problem. Explain.
Assuming a budget of $2,200,000 what are your recommendations for the above problem? Explain.
Explanation / Answer
Project 1
NPV = -490,000 + (438,998 + 176137)
= 125,135
PI = PV of inflow/PV of outflow = (438,998 + 176137)/490000
= 1.255
IRR=10.38%
payback= 4year 11 month
Project 2
NPV = -970,000 + (1099746 + 505078)
= 634,824
IRR=20.83%
PI =PV of inflow/PV of outflow = 1.654
payback=2 year 5 month
Project 3
NPV = -820,000 + ( 1,316,994 + 64392)
= 561,387
PI = PV of inflow/PV of outflow = 1.6846
IRR=24.86%
payback=2 year 9 month
(Part 2)
As the NPV is highest for project 2 but it also has high initial investment. So for initial money of 1,100,000 project 3 is best as it has highest PI value and less initial investment as compared to project 2.
IF initial money is large enough like 2.200,000 then project 2 is undoubtedly the best option.
Even for 1,100,000 we can adopt project 2 but it depend on the user what he can think