Question

Capital Budgeting Analysis: The MCSL Corp. is planning a new investment project which is expected to yield cash inflows of $180,000 per year in Years 1 through 3, $225,000 per year in Years 4 through 7, and $185,000 in Years 8 through 10. This investment will cost the company $880,000 today (initial outlay). We assume that the firm's cost of capital is 7.8%.

(1) Draw a time line to show the cash flows of the project.

2) Compute the project’s payback period, net present value (NPV), profitability index (PI), and internal rate of return (IRR).

(3) Discuss whether the project should be taken.

Answer 1

Part-1)

Year	0	1	2	3	4	5	6	7	8	9	10
Cash Inflows	-$880,000.00	$180,000.00	$180,000.00	$180,000.00	$225,000.00	$225,000.00	$225,000.00	$225,000.00	$185,000.00	$185,000.00	$185,000.00
Cumulative Cash Flows	-$880,000.00	-$700,000.00	-$520,000.00	-$340,000.00	-$115,000.00	$110,000.00	$335,000.00	$560,000.00	$745,000.00	$930,000.00	$1,115,000.00

　

Part-2) Pay Back Period: = 4 years + [115,000 / (110,000 + 115,000)] = 4.51 years

Net Present Value (NPV): 465,940 (using Excel NPV function)

Profitability Index (PI): PV of future cash Flows / Initial Investment = 1.53

Internal Rate Of Return (IRR): 18.19% (using Excel IRR function)

　

Part-3) Because the NPV is positive and IRR also exceeds the cost of capital thus project should be taken