Question

A firm is planning a new project that is projected to yield cash flows of -$515,000 in Year 1, $586,000 per year in Years 2 through 3, and $678,000 in Years 4 through 6, and $728,000 in Years 7 through 10. This investment will cost the company $2,780,000 today (initial outlay). We assume that the firm's cost of capital is 9.65%.

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

(2) Compute payback period, net present value (NPV), profitability index (PI), internal rate of return (IRR), and modified internal rate of return (MIRR).

(3) Discuss whether the project should be taken.

Answer 1

1: 2:

728000 728000 728000 728000 6/ВО00 Б/000 6/80000 586000 586000 Year 1 2 3 6 8 9 10 -515000

Payback	6.12
NPV	$306,975.24
PI	1.11
IRR	11.50%
MIRR	10.64%

3: Yes, the project should be undertaken since NPV is positive

Workings

Year	Cash flows	Cumulative CF
0	-2780000	-2780000
1	-515000	-3295000
2	586000	-2709000
3	586000	-2123000
4	678000	-1445000
5	678000	-767000
6	678000	-89000
7	728000	639000
8	728000	1367000
9	728000	2095000
10	728000	2823000

Payback = Year in which Cumulative CF is last negative -(Last negative cumulative CF/ CF of next year

Book1- Excel AutoSave Off Sign in Share View File Insert Review Help Tell me what you want to do Commen Home Draw Page Layout Formulas Data Insert A^ A Calibri General 11 Delete Conditional Format as Sort & Find & Paste Cell $% В I U Format Filter Select Styles Formatting Table Clipboard Alignment Number Styles Cells Editing Font fix E1 A В C D E F G H Cash flows Cumulative CF 1 Year B8-D8/C9 Payback -2780000 2 0 C2 =NPV(9.65%,C3:C12)+C2 3 1 -515000 D2+C3 NPV =NPV(9.65%,C3: C12)/-C2 =IRR(C2:C12) =MIRR(C2 : C12,9.65%,9.65%) 586000 4 2 D3+C4 PI 586000 D4+C5 IRR 678000 =D5+C6 4 MIRR =D6+C7 5 678000 678000 6 =D7+C8 7 728000 D8+C9 10 728000 D9+C10 11 9 728000 D10+C11 12 10 728000 D11+C12 13 14 X