I need to solve the NPV, IRR, Profitability Index and Payback Years that are hig
ID: 2786437 • Letter: I
Question
I need to solve the NPV, IRR, Profitability Index and Payback Years that are highlighted in the yellow box. Please explain how to do this and what answer I should come up with.
Capital Analysis Chapters 9, 10, 11 Year: Year: o Investment: (3,400) Sales Inputs Equipment Cost Salvage value, Year 4 Depreciation Per Year Units Sold Every Year Sales price per unit, Year 1 Annual change in sales price, after Year 1 Variable cost per unit (VC), Year 1 Annual change in VC, after Year 1 Fixed Cost (FC), Year 1 Annual change in FC, after Year 1 Project WACC Tax Rate Working Capital as% of next year's sales n n n Base Case 3,400 300 850 550 11.60 2.0% 6.00 2.0% 2,000 2.0% 11.85% 40.0% 12.0% Expenses: Vc FC Depreciation Net Earnings BT - $ $ $ - $ - $ - $ $ Tax (40%) Net Income $ Salvage value Depreciation NOWC Net Cash Flow DCF NPV IRR Profitabilty Index Payback Years (3,400) $ $oExplanation / Answer
Here Sales (1) = 550 x 11.6 = 6,380. For subsequent years, it grows at 2%
VC = 550 x 6 = 3,300 and it also increases by 2% each year
FC = 2000 and it increases by 2% as well
Tax = 40% x EBT
NOWC (0) = 12% x Sales (1) = -765.6
NOWC (1) = 12% x (Sales (2) - Sales (1)) = -15.312 and so on... we recover all the NOWC at the of the project.
Cash Flows = Investment + NOWC + Net Income + Depreciation + Salvage Value x (1 - tax)
DCF = CF / (1 + r)^n , where r = 11.85%
NPV = Sum of DCF = -504.23
IRR = IRR(-CF0...CF4) = 6.62%
PI = 1 + NPV / Investment = 1 - 504.23 / 3400 = 0.85
Payback Period = No. of years to recover investment = 3 - (CF0 + CF1 + CF2 + CF3) / CF4 = 3.60
0 1 2 3 4 Investment -3,400 Sales 6380 6507.6 6637.752 6770.507 VC -3300 -3366 -3433.32 -3501.99 FC -2000 -2040 -2080.8 -2122.42 Depreciation -850 -850 -850 -850 EBT 230 251.6 273.632 296.1046 Tax (40%) -92 -100.64 -109.453 -118.442 Net Income 138 150.96 164.1792 177.6628 Salvage 300 Depreciation 850 850 850 850 NOWC -765.6 -15.312 -15.6182 -15.9306 812.4608 Cash Flows -4,166 972.688 985.3418 998.2486 2020.124 DCF -4,166 869.6361 787.6167 713.3961 1290.726 NPV -504.23 IRR 6.62% PI 0.852 PBP 3.60