Question

Year:           Project A      Project B         Project C     Product D       Project E

0                   (10,000) (15,000)         (20,000)       (50,000)          (100,000)
1                      4,000          8,000 7,000          10,000              33,000
2                      4,000 6,000 7,000          15,000              40,000
3                      4,000          4,000 7,000          (5,000)              33,000
4                       ------           2,000    7,000 20,000              40,000
5                       ------   -----    ------           10,000              (10,000)
6                       ------             ------ ------           (1,000) ------

1. Calculate the payback of each project.

2. Calculate the discounted payback of each project (assume a cost-of-capital of 10 percent).

3. Calculate the NPV of each project (again, assume 10 percent).

4. Calculate the PI of each project (again, assume 10 percent).

5. Calculate the MIRR of each project.

6. Calculate the equivalent annual annuity of each project.

Answer 1

Q1 Using financial calculator to calculate payback period of each project

Project A

Inputs : C0 = (10,000)

C1 = 4,000 frequency = 3

• now press NPV button and then down arrow to go to PB

Pb = compute

We get, Payback period = 2.5 years

Project B

Inputs : C0 = - 15,000

C1 = 8,000 frequency = 1

C2 = 6,000. Frequency = 1

C3 = 4,000. Frequency = 1

C4 = 2,000. Frequency = !

Pb = compute

We get , Payback period = 2.25 years

Project C

Inputs : C0 = -20,000

C1 = 7,000 frequency = 4

Pb = compute

We get, payback period = 2.86 years

Project D

Inputs : C0 = - 50,000

C1 = 10,000. Frequency = 1

C2 = 15,000. Frequency = 1

C3 = -5,000. Frequency =1

C4 = 20,000. Frequency = 1

C5 = 10,000. Frequency = 1

C6 = -1,000. Frequency = 1

Pb = compute

Wd get , Payback period = 5 years

Project E

Inputs : Co = - 100,000

C1 = 33,000. Frequency = 1

C2 = 40,000. Frequency = 1

C3 = 33,000. Frequency = 1

C4 = 40,000. Frequency = 1

C5 = -10,000 frequency =1

Pb = compute

We get, payback period = 2.82 years

B) Discounted payback period

We use the same inputs for all the projects as in part a , and add an input i.e . i = 10% , to all the projects to get discounted payback period

• We also need to press NPV and use down arrow to go to Dpb ( discounted payback period,) and press compute

Project A discounted payback period = No period, as the cash outflow is not recovered

Project B =2.92 years

Project C= 3.54 years

Project D = No answer, as the cash outflow is not recovered

Project E = 3.45 years

C) Calculation of Npv

All the inputs would be same as in part B, expect we now need to press Npv and press compute.

Project A Npv = -$52.59

Project B = $1,602.69

Project c = $2,189.06

Project D = -$11,835.01

Project E.= $ 8,962.56

D) Calculate profitability index

Profitability index = cashoutflow + Npv /cash outflow

Use same formula for all project

Project A = 10,000 - 52,59 / 10,000 = 0.9947

Project B.= 15,000 + 1,602.69 / 15,000 = 1.1068

Project C = 20,000 + 2,189.06 / 20,000 = 1.1095

Project D = 50,000 - 11,835.01 / 50,000 = 0.7633

Project E = 100,000 + 8,962.56 / 100,000 = 1.1