Please Help!! Suppose Palmer Properties is considering investing $2.6 million to
ID: 2714399 • Letter: P
Question
Please Help!!
Suppose Palmer Properties is considering investing $2.6 million today (i.e., C0 = -2,600,000) on a new project that is expected to last for 7 years. The project is expected to generate annual cash flows of C1 = -250,000; C2 = 300,000, C3 = 500,000 and then $800,000 for period C4 through C7. If the discount rate is 8% and management’s payback period cutoff is 5 years:
(a) What is the payback period for the project? Show your work
(b) What is the net present value of the project ? Show your work
(c) What is the internal rate of return on the project ? Show your work
(d) Under which method(s) above should the company accept the project (applying the acceptance rules)? Explain
Explanation / Answer
The company shud not accept this project, as it genrates negative NPV, its IRR is less than the discount rate and payback period is not within the defined cutoff of 5 years.
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Cash flow -2600000 -250000 300000 500000 800000 800000 800000 800000 Discount rate % 8.0% present value of cashflows -2600000 -231481.5 257201.6 396916.1 588023.9 544466.6 504135.7 466792.3 NPV -73945.26 IRR 7.38% Cumulative Cash Flow -2600000.00 -2850000.00 -2550000.00 -2050000.00 -1250000.00 -450000.00 350000.00 1150000.00 Dicounted cumulative cash flows -2600000.00 -2831481.48 -2574279.84 -2177363.71 -1589339.83 -1044873.28 -540737.57 Profitability Index = PV of future cashflows/initial investment 0.97 Paybac period 5 years 7 months