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