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You are considering a project that will require an initial outlay of $400,000. This project has...

You are considering a project that will require an initial outlay of $400,000. This project has an expected life of four years and will generate after-tax cash flows to the company as a whole of $120,000 at the end of each year over its five-year life. Thus, the free cash flows associated with this project look like this:

Year Free Cash Flow
0 -150,000
1 120,000
2 120,000
3 120,000
4 120,000

Given a required rate of return of 20% percent, calculate the following:

a. Discounted payback period

b. Net present value

c. Profitability index

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Answer #1

a) Computation of Discounted payback period:- Cumulative Discounted Cashflows $ Cash Discounted PVF @ 20% Cashflows $ Year Flows (S) (150,000) 120,000 120,000 120,000 120,000 1.000 (150,000) 0.833 0.694 0.579 0.482 100,000 83,333 69,444 57,870 (150,000) (50,000) 33,333 102,778 160,648 Discounted Payback period is 1 year+(50000/83333) Discounted Payback period is = 1.60 Years b) Computation of Discounted pavback period :- Discounted Cashflows $ 1.000 (150,000) 100,000 83,333 69,444 57,870 Net Present Value (NPV) 160,648 Cash Year PVF @ 20% Flows (S) (150,000) 120,000 120,000 120,000 120,000 0.833 0.694 0.579 0.482 Net Present Value (NPV) is S 160,648/. Approx. c) Profitability Index is (NPV+Initial Investment)/Initial Investment Profitability Index is (160648+150000)/150000 Profitability Index is - 2.07 Times Approx.

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