05.04.2021
ASSIGNMENT 5
1) An investment Project provides cash inflows of $915 per year for eight years. What is
the Project payback period if the initial cost is $3,400?
$915 for 8 years. İnitial investment is 3,400$.
Payback Period= Initial Investment/Annual Cash Flow
=$3,400/$915
=3.72
So, the payback period of the project with initial investment of $3,400 is 3.72 years.
2) Bill plans to open a grooming center. The grooming equipment will cost $207,000. Bill
expects after tax cash inflows of $64,000 annually for seven years, after which he plans
to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs
at the end of the first year. Assume the required return is 15 percent. What is the
project’s Profitability Index? Should it be accepted?
Profitability Index= Total PV of Future Cash Flows / Initial Investments
Present Value of Cash Flows=Cash Flows*[1-1/(1+R)n]/R
=$64,000*[1-1/(1+0.15)7]/0.15
=$64,000*4.16042
Present Value of Cash Flows =266,266.863
Profitability Index=266,266.863/207,000
Profitability Index =1.29
Profitability Index is greater than 1, so it should be accepted.
3) Fast Machine, Inc. have a Project with the following cash flows. The company evaluates
the Project by applying the IRR rule. If the appropriate discount rate is 9 percent, should
the company accept the Project?
Year
Cash Flows ($)
0
-$16,100
1
7,800
2
9,100
3
5,300
05.04.2021
IRR is the rate at which NPV is zero. The internal rate of return is calculated as
Net present value is calculated as (at discount rate of 19%)
=7800
(1 + 19%)1+ 9100
(1 + 19%)2+5300
(1 + 19%)3−16,100
=6,554.62 + 6,426.10+3,145.10-16,000
=$25.83
It is the NPV of the project at a discount rate of 19% is $25.83
Net present value is calculated as (at discount rate of 20%)
=7800
(1 + 20%)1+ 9100
(1 + 20%)2+5300
(1 + 20%)3−16,100
