A Project costs $130,000 and is expected to generate year-end cash inflows of $40, 000, $30,000, $72, 000, $ 91,000 and $ 100,000 in years 1 through 5. The opportunity cost of capital for the company is 15%.
Required:
- Evaluate the project suitability based on the NPV approach
- Evaluate the project suitability based on the Payback period approach
- Evaluate the project suitability based on the Profitability Index approach
Explain how you can use internal rate of return to evaluate a project
A Project costs $130,000 and is expected to generate year-end cash inflows of $40, 000, $30,000, $72, 000, $ 91,000 and $ 100,000 in years 1 through 5. The opportunity cost of capital for the company is 15%.
Required:
- Evaluate the project suitability based on the NPV approach
- Evaluate the project suitability based on the Payback period approach
- Evaluate the project suitability based on the Profitability Index approach
Explain how you can use internal rate of return to evaluate a project
Related questions
| 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: | ||||
| Consider the following two mutually exclusive projects: |
| Year | Cash Flow (A) | Cash Flow (B) |
| 0 | â$428,000 | â$41,500 |
| 1 | 42,500 | 20,700 |
| 2 | 63,500 | 13,000 |
| 3 | 80,500 | 20,100 |
| 4 | 543,000 | 16,900 |
| The required return on these investments is 14 percent. |
| Required: | |
| (a) | What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) |
| Payback period | |
| Project A | years |
| Project B | years |
| (b) | What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) |
| Net present value | |
| Project A | $ |
| Project B | $ |
| (c) | What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Internal rate of return | |
| Project A | % |
| Project B | % |
| (d) | What is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 3 decimal places (e.g., 32.161).) |
| Profitability index | |
| Project A | |
| Project B | |
| (e) | Based on your answers in (a) through (d), which project will you finally choose? |
