Question

how would u answer this on a calculator ?

- 4 8 x 8 30 2. Project LMK requires an initial outlay of $375,000 and it is expected to generate annual cash flows of 4 N $60,000 each year for the next 5 years (years 1 through 5) and $50,000 each year over the following 5 W years (years 6 through 10). The required return for this project is 18%. Calculate the following for Project MLK: The payback period The discounted payback period The internal rate of return (IRR) The net present value (NPV) The profitability index a. e.

Answer 1

a) 6yrs+(375000-350000)/50000

PBP= 6.5yrs

b) DPBP= company will not be able to recover the entire investment according to DPBP method because cash inflow stop after 10yrs

c) IRR

CF3 CE CF2 CFR 0 = CFO (1 + IRR)* (1 + IRR)2 + (1 + IRR)3 +...+(1 + IRR)N 0 = NPV = Ś C F CERT En Where: CF, = Initial Investment / Outlay CF1, CF2, CF2 ... CEn = Cash flows n = Each Period N = Holding Period NPV = Net Present Value IRR = Internal Rate of Return

year	cashflow	disc 7%	PV of cash flow
0	-375000	1	-375000
1	60000	0.934	56040
2	60000	0.873	52380
3	60000	0.816	48960
4	60000	0.763	45780
5	60000	0.713	42780
6	50000	0.666	33300
7	50000	0.622	31100
8	50000	0.582	29100
9	50000	0.544	27200
10	50000	0.508	25400

IRR is 7% when NPV is 0

d)

	1	2	3	4	5	6	7	8	9	10
inflow	60000	60000	60000	60000	60000	50000	50000	50000	50000	50000
discount 18%	0.847	0.718	0.609	0.516	0.437	0.37	0.314	0.266	0.225	0.191
PV of inflow	50820	43080	36540	30960	26220	18500	15700	13300	11250	9550	255920
Initial outflow											375000
NPV											-119080

e) profitability index = PV of future cashflows/ initial investment

255920/375000= 0.6824