Question

An electronic company is planning for huge investment to be undertaken in the next year. To...

An electronic company is planning for huge investment to be undertaken in the next year. To conduct this project, the company has an overhaul investment amounting of USD 3 million. This project is expected to long last for 8 years and is expected to have a proceed of USD 500,000 annually. The market expects the rate of return with 10% annually.

What do you think of the planned project as a managerial accountant? Using the three methods of evaluation in capital budget?

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Answer #1

Year

cash flow

present value of cash flow = cash flow/(1+r)^n r =10%

0

-3000000

1

500000

454545.5

2

500000

413223.1

3

500000

375657.4

4

500000

341506.7

5

500000

310460.7

6

500000

282237

7

500000

256579.1

8

500000

233253.7

sum of present value of cash inflow

2667463

less cash outflow

3000000

NPV

-332537

Profitability Index

sum of present value of cash inflow/cash outflow

0.889154

IRR =using IRR function in MS excel

irr(-3000000,500000,500000,500000,500000,500000,500000,500000,500000)

6.88%

IRR,NPV and PI indicates that project is not feasible because NPV is negative, PI is less than one and IRR is lower than discount rate so project should not be accepted
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