08 Jun Question Project 1 Year Cash flow Rate @ 4.5% Present value
Question
Project 1
Year Cash flow Rate @ 4.5% Present value
0 $ -490,000.00 1 $ -490,000.00
1 $ 100,000.00 0.9569378 $ 95,693.78
2 $ 100,000.00 0.91573 $ 91,573.00
3 $ 100,000.00 0.8762966 $ 87,629.66
4 $ 100,000.00 0.8385613 $ 83,856.13
5 $ 100,000.00 0.802451 $ 80,245.10
6 $ 50,000.00 0.7678957 $ 38,394.79
7 $ 50,000.00 0.7348285 $ 36,741.42
8 $ 50,000.00 0.7031851 $ 35,159.26
9 $ 50,000.00 0.6729044 $ 33,645.22
10 $ 50,000.00 0.6439277 $ 32,196.38
NPV = Present value of the cash flows – initial investment
Present value of cash flows $ 615,134.75
Initial investment $ -490,000.00
Net present value $ 125,134.75
Calculating with the help of excel formula:
Net present value $ 125,134.75
IRR 10.38%
PI = Present value of cas flows / Initial investment
Present value of cash flows $ 615,134.75
Initial investment $ -490,000.00
Profitability index = 1.26
Project 2
Year Cash flow Rate @ 4.5% Present value
0 $ -970,000.00 1 $ -970,000.00
1 $ 400,000.00 0.9569378 $ 382,775.12
2 $ 400,000.00 0.91573 $ 366,291.98
3 $ 400,000.00 0.8762966 $ 350,518.64
4 $ – 0.8385613 $ –
5 $ – 0.802451 $ –
6 $ – 0.7678957 $ –
7 $ – 0.7348285 $ –
8 $ 250,000.00 0.7031851 $ 175,796.28
9 $ 250,000.00 0.6729044 $ 168,226.11
10 $ 250,000.00 0.6439277 $ 160,981.92
NPV = Present value of the cash flows – initial investment
Present value of cash flows $ 1,604,590.05
Initial investment $ -970,000.00
Net present value $ 634,590.05
Calculating with the help of excel formula:
Net present value $ 634,590.05
IRR 20.83%
PI = Present value of cas flows / Initial investment
Present value of cash flows $ 1,604,590.05
Initial investment $ -970,000.00
Profitability index = 1.65
Project 3
Year Cash flow Rate @ 4.5% Present value
0 $ -820,000.00 1 $ -820,000.00
1 $ 300,000.00 0.9569378 $ 287,081.34
2 $ 300,000.00 0.91573 $ 274,718.99
3 $ 300,000.00 0.8762966 $ 262,888.98
4 $ 300,000.00 0.8385613 $ 251,568.40
5 $ 300,000.00 0.802451 $ 240,735.31
6 $ – 0.7678957 $ –
7 $ – 0.7348285 $ –
8 $ – 0.7031851 $ –
9 $ – 0.6729044 $ –
10 $ 100,000.00 0.6439277 $ 64,392.77
NPV = Present value of the cash flows – initial investment
Present value of cash flows $ 1,381,385.79
Initial investment $ -820,000.00
Net present value $ 561,385.79
Calculating with the help of excel formula:
Net present value $ 561,385.79
IRR 24.86%
PI = Present value of cas flows / Initial investment
Present value of cash flows $ 1,381,385.79
Initial investment $ -820,000.00
Profitability index = 1.68
Project 2 is better than Project 1 because it has higher NPV and IRR
Project 3 is better than Project 2 even though it has a lower NPV it has a higher IRR and Profitablity index.
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