Question
The Ross brothers are adding new manufacturing equipment to thier businesses. All in costs of the...
The Ross brothers are adding new manufacturing equipment to thier businesses.
All in costs of the assets will be 15 million.
The cost to finance the project will be 10 %
They are expecting a negative cash flow in year one of one million.
Year 2 the expected after tax cash flow is 6 million.
Year 3 the expected after tax cash flow 5.5 million
Year 4 the expected after tax cash flow 4 million
Year 5 the expected after tax cash flow 7 million
Calculate the MPV and RRI and the payback and profitability of the project.
Homework Answers
Answer #1
| NPV | 0.26 |
| IRR | 10.54% |
| Payback | 4.07 |
| Profitability Index | 1.02 |
WORKINGS
The cash flows are as below
| Year | cash flows (Million $) | Cumulative CF |
| 0 | -15 | -15 |
| 1 | -1 | -16 |
| 2 | 6 | -10 |
| 3 | 5.5 | -4.5 |
| 4 | 4 | -0.5 |
| 5 | 7 | 6.5 |
Payback = Year in which Cumulative CF is last negative -(Last
negative cumulative CF/ CF of next year
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