Part 1) Using a 4.5% discount rate, calculate the Net Present Value, Payback, Pr
ID: 2777983 • 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 Year Outflow/Inflow PV F @ 4.5% PV of cash flows 0 -490000 1 -490000 1 100000 0.95694 95694 2 100000 0.91573 91573 3 100000 0.8763 87630 4 100000 0.83856 83856 5 100000 0.80245 80245 6 50000 0.7679 38395 7 50000 0.73843 36921.5 8 50000 0.70319 35159.5 9 50000 0.6729 33645 10 50000 0.64393 32196.5 NPV 125315.5 Payback period To payabck $ 400000 -4 completed yrs. To payback bal. $ 90000 of the initial investment ($ 490000) -1/100000*90000= 0.9 yrs. So, total Payback period= 4+ 0.9= 4.9 years. Profitability Index= 1+NPV/Initial Investment = 1+(125315.5/490000) = 1.255746 ie. 1.26 IRR ie. Rate which equates the PV of cash inflows& outflows= (as per Excel ) = 10.3794% ie. 10.38% Project 2 Year Outflow/Inflow PV F @ 4.5% PV of cash flows 0 -970000 1 -970000 1 400000 0.95694 382776 2 400000 0.91573 366292 3 400000 0.8763 350520 4 0 0.83856 0 5 0 0.80245 0 6 0 0.7679 0 7 0 0.73843 0 8 250000 0.70319 175797.5 9 250000 0.6729 168225 10 250000 0.64393 160982.5 NPV 634593 Payback period To payabck $ 800000 -2 completed yrs. To payback bal. $ 170000 of the initial investment ($ 970000) -1/400000*170000= 0.425 yrs. So, total Payback period= 2+ 0.425= 2..425 years. Profitability Index= 1+NPV/Initial Investment = 1+(634593/970000) = 1.65422 ie. 1.65 IRR ie. Rate which equates the PV of cash inflows& outflows= (as per Excel ) = 20.8304% ie. 20.83% Project 3 Year Outflow/Inflow PV F @ 4.5% PV of cash flows 0 -820000 1 -820000 1 300000 0.95694 287082 2 300000 0.91573 274719 3 300000 0.8763 262890 4 300000 0.83856 251568 5 300000 0.80245 240735 6 0 0.7679 0 7 0 0.73843 0 8 0 0.70319 0 9 0 0.6729 0 10 100000 0.64393 64393 NPV 561387 Payback period To payabck $ 600000 -2 completed yrs. To payback bal. $ 220000 of the initial investment ($ 820000) -1/300000*220000= 0.73 yrs. So, total Payback period= 2+ 0.73= 2.73 years. Profitability Index= 1+NPV/Initial Investment = 1+(561387/820000) = 1.684618 ie. 1.68 IRR ie. Rate which equates the PV of cash inflows& outflows= (as per Excel ) = 24.8579% ie. 24.86% NPV Payback PI IRR Project 1 125315.5 4.9 yrs. 1.26 10.38% Project 2 634593 2.425 yrs. 1.65 20.83% Project 3 561387 2.73 yrs. 1.68 24.86% Ranking according to NPV Pay back PI IRR 2 2 3 3 3 3 2 2 1 1 1 1 As the initial investment is less , Project 3 with greatest PI is ranked 1 even though NPV is less than for project 2 Rank-2 --Project 2 Rank 3--- Project 1 Part2 1100000-970000= 130000 Only project 2 with maximum NPV can be chosen, to utilise the maximum resource available Part 3 Funds available- 2200000 Project 3 -- 820000 Project 2-- 970000 Total 1790000 Bal. 410000 (inadequate) So, Project 3 & 2 are recommended for higher PI & NPV