calculate payback period and IRR
Time line | 0 | |
Cost of new machine | -940000 | |
=Initial Investment outlay | -940000 |
Time line | 0 | 1 | 2 | 3 | 4 | |||
Cost of new machine | -940000 | |||||||
=Initial Investment outlay | -940000 | |||||||
100.00% | ||||||||
Sales | 880000 | 880000 | 880000 | 880000 | ||||
Profits | Sales-variable cost | 721600 | 721600 | 721600 | 721600 | |||
Fixed cost | -222000 | -222000 | -222000 | -222000 | ||||
-Depreciation | Cost of equipment/no. of years | -235000 | -235000 | -235000 | -235000 | 0 | =Salvage Value | |
=Pretax cash flows | 264600 | 264600 | 264600 | 264600 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | 201096 | 201096 | 201096 | 201096 | |||
+Depreciation | 235000 | 235000 | 235000 | 235000 | ||||
=after tax operating cash flow | 436096.00 | 436096.00 | 436096 | 436096 | ||||
+Tax shield on salvage book value | =Salvage value * tax rate | 0 | ||||||
=Terminal year after tax cash flows | 0 | |||||||
Total Cash flow for the period | -940000 | 436096.00 | 436096.00 | 436096.000 | 436096 |
Project | |||||
Year | Cash flow stream | Cumulative cash flow | |||
0 | -940000 | -940000 | |||
1 | 436096 | -503904 | |||
2 | 436096 | -67808 | |||
3 | 436096 | 368288 | |||
4 | 436096 | 804384 | |||
Payback period is the time by which undiscounted cashflow cover the intial investment outlay | |||||
this is happening between year 2 and 3 | |||||
therefore by interpolation payback period = 2 + (0-(-67808))/(368288-(-67808)) | |||||
2.16 Years | |||||
Project | |||||
IRR is the rate at which NPV =0 | |||||
IRR | 0.302974796 | ||||
Year | 0 | 1 | 2 | 3 | 4 |
Cash flow stream | -940000 | 436096 | 436096 | 436096 | 436096 |
Discounting factor | 1 | 1.302975 | 1.697743 | 2.212117 | 2.8823324 |
Discounted cash flows project | -94000000.00% | 334692.6 | 256868 | 197139.7 | 151299.69 |
NPV = Sum of discounted cash flows | |||||
NPV Project = | 2.19402E-05 | ||||
Where | |||||
Discounting factor = | (1 + IRR)^(Corresponding period in years) | ||||
Discounted Cashflow= | Cash flow stream/discounting factor | ||||
IRR= | 30.30% | ||||
calculate payback period and IRR Pappy's Potato has come up with a new product, the Potato...
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Finance question, help please
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