Question

(A)
A company is considering a major expansion of its product line. The
initial outlay would be $10,100,000 and the project would generate
cash flows of $1,290,000 per year for 20 years. The appropriate
discount rate is 10%. (a) calculate the NPV (b) calculate the PI
(c) calculate the IRR (d) should this project be excepted?

(B) The same company is considering a new system for its lot.
The system will provide annual labor savings and reduced waste
totaling $175,000 with the initial investment of only $485,000. The
appropriated discount rate for this type of project is 11% what is
the project is kind of payback period.

(C) The company is considering a project with an initial cash
outlay of $77,000 and expected cash flows of $21,560 at the end of
each year for 6 years. The discount rate for this project is 9.5%.
(a) what are their projects payback and discounted payback periods?
(b) what is the projects NPV? (c) what is the projects PI? (d) what
is the projects IRR?

Answer #1

**A)**

**a**)- NPV= PV inflow -- PV outflow
**PV inflow = cash flow /(1+discount rate)^N N= no of
years**

(from this we will get pv of inflow for every year)

for 1st year 1290000/(1+10%)^1 = 1172727 ( we have to do similarly for 20 Years )

PV inflow = 10982497 PV outflow = 10100000

**Npv = 10982497--10100000 = 882497**

**b)** PI is the profitability index shows
profitability of the project

PI = PV inflow / PV outflow

10982497 / 10100000 = 1.088

**c)** IRR
is the actual rate of return earned by the investor excludeing
financing cost (if any)

IRR =
**11.27%**

**d)** NPV is net present value means how much you
are earning above your initial investment today

**there are three rules of NPV**

- 1) if npv is more than zero ACCEPT the project
- 2) If npv is equal to zero ACCEPT the project
- 3)if npv is less than zero REJECT the project

as in our project npv is positive conclusion is accept the project

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