Question 1.)
a.) Evaluate a 5-year project costing $32,000 and returning $5,000 annually using the payback period technique and a 4-year cutoff.
b.) Evaluate the project above using the NPV method and a 13% required rate.
c.) Evaluate the project in part "a" using the profitability index method and a 10% required return.
Please show formulas used (not a spreadsheet) and how you worked out the problem, thank you!
a: The cumulative cash flows are
Year 1 = -32000+5000 = -27000
Year 2 = -27000+5000 = -22000
Year 3 = -22000+5000 = -17000
Year 4 = -17000+5000=-12000
Year 5 = -12000+5000 = -7000
The project cannot be accepted since investment is not recovered till cut off period of year 4
b: NPV= C0+ CF1/(1+r)^1 + CF2/(1+r)^2 …………CFn/(1+r)^n
= -32000+5000/1.13^1+5000/1.13^2+5000/1.13^3+5000/1.13^4+5000/1.13^5=
-14413.84 |
Reject the project since NPV is negative
c: PI = PV of inflows/Initial cost = 5000/1.1^1+5000/1.1^2+5000/1.1^3+5000/1.1^4+5000/1.1^5/32000
=0.59
Reject the project since Profitability index is less than 1
Question 1.) a.) Evaluate a 5-year project costing $32,000 and returning $5,000 annually using the payback...
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