Please answer the following questions using the information below: NPV. Using a 10% required rate of return, calculate the NPV for this project. Should it be accepted or rejected? PI. Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected? Consider the following cash flows: Year 0 1 2 3 4 5 6 Cash Flow -$8,000 $3,000 $3,600 $2,700 $2,500 $2,100 $1,600
Please answer the following questions using the information below:
- NPV. Using a 10% required
rate of return , calculate the NPV for this project. Should it be accepted or rejected? - PI. Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected?
Consider the following cash flows:
Year 0 1 2 3 4 5 6
Cash Flow -$8,000 $3,000 $3,600 $2,700 $2,500 $2,100 $1,600
- Payback. The company requires all projects to payback within 3 years. Calculate the payback period. Should it be accepted or rejected?
- Discounted Payback. Calculate the discounted payback using a discount rate of 10%. Should it be accepted or rejected?
IRR . Calculate the IRR for this project. The company’s required rate of return is 10%. Should it be accepted or rejected?- NPV. Using a 10% required rate of return, calculate the NPV for this project. Should it be accepted or rejected?
- PI. Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected?
Expert Answer
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| Year | Cash Flow |
| 0 | -8000 |
| 1 | 3000 |
| 2 | 3600 |
| 3 | 2700 |
| 4 | 2500 |
| 5 | 2100 |
| 6 | 1600 |
Answer 1)
Payback period = Number of years preceding to which investment in recovered + ((Initial Investment − Sum of cash flows in year preceding to which investment in recovered) / Cash flow in which investment in recovered)Payback period = Number of years preceding to which investment in recovered + ((Initial Investment - Sum of cash flows in year preceding to which investment in recovered) / Cash flow in which investment in recovered)
Payback period = 2+ ((8000 − 6600) / 2700)Payback period = 2+ ((8000 - 6600) / 2700)
Payback period = 2+ (1400 / 2700)Payback period = 2+ (1400 / 2700)
Payback period = 2.52 yearsPayback period = 2.52 years
The project should be accepted since the payback period is lower than the cut off period of 3 years.
Answer 2)
| Year | Cash Flow | Discounted Cash Flow = Cash Flow / (1+Discount Rate)YearDiscounted Cash Flow = Cash Flow / (1+Discount Rate)Year | Working |
| 0 | -8000 | -8000.00 | (-)8,000/(1.10)^0 |
| 1 | 3000 | 2727.27 | 3,000/(1.10)^1 |
| 2 | 3600 | 2975.21 | 3,600/(1.10)^2 |
| 3 | 2700 | 2028.55 | 2,700/(1.10)^3 |
| 4 | 2500 | 1707.53 | 2,500/(1.10)^4 |
| 5 | 2100 | 1303.93 | 2,100/(1.10)^5 |
| 6 | 1600 | 903.16 | 1,600/(1.10)^6 |
Discounted Payback period = Number of years preceding to which investment in recovered + ((Initial Investment − Sum of discounted cash flows in year preceding to which investment in recovered) / Discounted Cash flow in which investment in recovered)Discounted Payback period = Number of years preceding to which investment in recovered + ((Initial Investment - Sum of discounted cash flows in year preceding to which investment in recovered) / Discounted Cash flow in which investment in recovered)
Discounted Payback period = 3 + ((8000 − 7731.03) / 1707.53)Discounted Payback period = 3 + ((8000 - 7731.03) / 1707.53)
Discounted Payback period = 3 + (268.97/ 1707.53)Discounted Payback period = 3 + (268.97/ 1707.53)
Discounted Payback period = 3.16 yearsDiscounted Payback period = 3.16 years
As per the discounted payback period analysis, we should reject the project since the cut off for the payback period is 3 years and the payments arrive in a later period in comparison to the cut off for discounted payback period.
Answer 3)
We calculate the IRR using IRR function in excel.
Type cash flows in a range of cells
Type =IRR and press tab key
Select range of cash flows and press ENTER
We get IRR = 26.31%
The project should be accepted since the IRR is greater than the discount rate of 10%.
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