Question

s20 608 the end of each year r over its five-year life. In addition to the $20608 cash flow from tions during the fifth and final year, there will be an additional cash flow of $13 200 at the end of the fifth year associated with the salvage value of the system, making the cash fow in yeat 5 cqual to $33 808. Thus, the cash flows associated with this project can be summarised as follows: YEAR CASH FLOW -$54 200 20608 20608 20608 20608 33808 Given a required rate of return of 15%, calculate the following: (a) Payback period (b) Discounted payback period (c) Net present value d) Profitability index (e) Internal rate of return Should this project be accepted?

Answer 1

Part 1

year	Cash flows	Cumulative cash flows
0	-54200	-54200
1	20608	-33592
2	20608	-12984
3	20608	7624
4	20608	28232
5	33808	62040

Payback period = the year with last negative cumulative cash flows + (7624/20608)

=2+ (7624/20608)

= 2.37 years

Part 2

year	Cash flows	Discounted cash flows (15%)	Cumulative discounted cash flows
0	-54200	-54200	-54200
1	20608	17920 (20608/(1.15^1)	-36280
2	20608	15582.61 (20608/(1.15^2)	-20697.39
3	20608	13550.09 (20608/(1.15^3)	-7147.30
4	20608	11782.69 (20608/(1.15^4)	4635.39
5	33808	16808.55 (33808/(1.15^5)	21443.95

Discounted payback period = the year with last negative Cumulative discounted cash flows + (4635.39/11782.69)

= 3+(4635.39/11782.69)

= 3.39 years

Part 3

year	Cash flows	Present value of cash flows (15%)
0	-54200	-54200
1	20608	17920 (20608/(1.15^1)
2	20608	15582.61 (20608/(1.15^2)
3	20608	13550.09 (20608/(1.15^3)
4	20608	11782.69 (20608/(1.15^4)
5	33808	16808.55 (33808/(1.15^5)
NPV		21443.95

Part 4

Profitability index = 1+(NPV/initial investment) = 1+(21433.95/54200) = 1.40

Part 5

IRR = 29.59%

(Using excel formula IRR)

In excel write all values in consequent rows.

Cash flows

-54200

20608

20608

20608

20608

33808

Then apply the formula,

= IRR (select all values) and then press to get an answer

Yes, the project should be accepted because NPV is positive, profitability index is greater than 1 and IRR is greater than the required rate of return.