Need help solving these:
Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.60 million and create incremental cash flows of $591,135.00 each year for the next five years. The cost of capital is 11.13%. What is the internal rate of return for the J-Mix 2000?
Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.85 million and create incremental cash flows of $505,435.00 each year for the next five years. The cost of capital is 10.06%. What is the profitability index for the J-Mix 2000?
Thanks!
Calculation of IRR | ||||||||
24.00% | 25.00% | |||||||
Year | Capital | Operating cash | Total cash flow | PV factor @ 24% | Present values | PV factor @ 25% | Present values | |
0 | $ (1,600,000) | $ (1,600,000) | 1.000 | $ (1,600,000) | 1.000 | $ (1,600,000) | ||
1 | $ 591,135 | $ 591,135 | 0.806 | $ 476,722 | 0.800 | $ 472,908 | ||
2 | $ 591,135 | $ 591,135 | 0.650 | $ 384,453 | 0.640 | $ 378,326 | ||
3 | $ 591,135 | $ 591,135 | 0.524 | $ 310,043 | 0.512 | $ 302,661 | ||
4 | $ 591,135 | $ 591,135 | 0.423 | $ 250,034 | 0.410 | $ 242,129 | ||
5 | $ - | $ 591,135 | $ 591,135 | 0.341 | $ 201,641 | 0.328 | $ 193,703 | |
$ 22,893 | $ (10,272) | |||||||
IRR | =Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV) | |||||||
IRR | '=24%+ (25%-24%)*(22892.8/(22892.8-(-10272.) | |||||||
24.69% |
Calculation of profitability index | |||||
10.06% | |||||
Year | Capital | Operating cash | Total cash flow | PV factor @ 10.06% | Present values |
0 | $ (1,850,000) | $ (1,850,000) | 1.000 | $ (1,850,000) | |
1 | $ 505,435 | $ 505,435 | 0.909 | $ 459,236 | |
2 | $ 505,435 | $ 505,435 | 0.826 | $ 417,260 | |
3 | $ 505,435 | $ 505,435 | 0.750 | $ 379,120 | |
4 | $ 505,435 | $ 505,435 | 0.682 | $ 344,467 | |
5 | $ - | $ 505,435 | $ 505,435 | 0.619 | $ 312,981 |
NPV | $ 63,063 | ||||
Profitability index= | Sum of PV of inflows/Outflow | ||||
Profitability index= | 1913063.09/1850000 | ||||
Profitability index= | 1.034 |
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