An expansion project being considered by your firm has an initial cost of $1,250,000 and expected net cash flows of $270,000 per year for the first 3 years, and $380,000 per year for the next three years. Assume that the project will be terminated at the end of the sixth year. Your firmâs cost of capital is 11%. Calculate the Net Present Value (NPV), the Modified Internal Rate of Return (MIRR), the Profitability Index and the Discounted Payback for this project.
An expansion project being considered by your firm has an initial cost of $1,250,000 and expected net cash flows of $270,000 per year for the first 3 years, and $380,000 per year for the next three years. Assume that the project will be terminated at the end of the sixth year. Your firmâs cost of capital is 11%. Calculate the Net Present Value (NPV), the Modified Internal Rate of Return (MIRR), the Profitability Index and the Discounted Payback for this project.
Related questions
You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%.
The projects’ expected net cash flows are as follows:
|
|
Expected Net Cash Flows |
|
|
Year |
Project A |
Project B |
|
0 |
($50,000) |
($50,000) |
|
1 |
25,000 |
15,000 |
|
2 |
20,000 |
15,000 |
|
3 |
10,000 |
15,000 |
|
4 |
5,000 |
15,000 |
|
5 |
5,000 |
15,000 |
- Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
| Question: | ||||
| The Sanders Electric Company is evaluating two projects for possible inclusion in the firmâs capital budget. Project M will require a $37,000 investment while project Oâs investment will be $46,000. After-tax cash inflows are estimated as follows for the two projects: | ||||
| Year | Project M | Project O | ||
| 1 | $12,000 | $10,000 | ||
| 2 | 12000 | 10000 | ||
| 3 | 12000 | 15000 | ||
| 4 | 12000 | 15000 | ||
| 5 | 15000 | |||
| a. | Determine the payback period for each project. | |||
| Payback (M) = | ||||
| Payback (O) = | ||||
| b. | Calculate the net present value and profitability index for each project based on a 10 percent cost of capital. Which, if either, of the project is acceptable? | |||
| NPV (M) = | ||||
| PI (M) = | ||||
| NPV (O) = | ||||
| PI (O) = | ||||
| c. | Determine the internal rate of return and modified internal rate of return for Projects M and O. | |||
| IRR (M): | ||||
| IRR (O): | ||||
| MIRR calculation of project M: | ||||
| MIRR calculation of project O: | ||||
