A company is evaluating a project with the following projected cash flow characteristics. Calculate the NPV, IRR and Payback period. Assume the company requires a return greater than 9% for this project and a payback period of less than 5 years to undertake it. Based on your findings should the company undertake the project? Explain.
|
Year
|
Annual Payment
|
Payback Calculation
|
|
0
|
($75,000)
|
|
|
1
|
$5,000
|
|
|
2
|
$25,000
|
|
|
3
|
$25,000
|
|
|
4
|
$10,000
|
|
|
5
|
$50,000
|
|
|
6
|
$40,000
|
|
NPV:
IRR:
Payback period:
2. A company is evaluating between two mutually exclusive projects. The estimated cash flows are indicated below. Calculate the NPV and IRR for both projects. The discount rate related to Project A is 12% and the discount rate related to Project B is 16%.
a) Assuming the company is trying to maximize NPV which project should it undertake?
b) Assume the company is trying to maximize the IRR, which project should it undertake?
|
Year
|
Project A
|
Project A
|
|
0
|
($100,000)
|
($5,000)
|
|
1
|
$0
|
$1,500
|
|
2
|
$0
|
$1,500
|
|
3
|
$0
|
$1,500
|
|
4
|
$0
|
$1,500
|
|
5
|
$0
|
$1,500
|
|
6
|
$250,000
|
$3,000
|
Discount Rate: 12% 16%
a) NPV:
b) IRR:
3. Below are the relevant financial statement details of a project. Please anwer the subsequent questions.
|
|
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
|
Income Statement:
|
|
|
|
|
|
|
|
Revenues
|
|
$300,000
|
$325,000
|
$350,000
|
$375,000
|
$400,000
|
|
Cost of Goods Sold
|
|
($180,000)
|
($195,000)
|
($210,000)
|
($225,000)
|
($240,000)
|
|
Gross Profit
|
|
$120,000
|
$130,000
|
$140,000
|
$150,000
|
$160,000
|
|
SG&A
|
|
($30,000)
|
($32,500)
|
($35,000)
|
($37,500)
|
($40,000)
|
|
Depreciation Expense
|
|
($50,000)
|
($50,000)
|
($50,000)
|
($50,000)
|
($50,000)
|
|
Operating Income
|
|
$40,000
|
$47,500
|
$55,000
|
$62,500
|
$70,000
|
|
Taxes
|
|
($16,000)
|
($19,000)
|
($22,000)
|
($25,000)
|
($28,000)
|
|
Net Income
|
|
$24,000
|
$28,500
|
$33,000
|
$37,500
|
$42,000
|
|
Balance Sheet Items:
|
|
|
|
|
|
|
|
Investments in equipment
|
($250,000)
|
$0
|
$0
|
$0
|
$0
|
$0
|
|
Investment in working capital
|
($25,000)
|
($2,500)
|
($2,500)
|
($2,500)
|
($2,500)
|
$25,000
|
|
Net Balance Sheet Changes
|
($275,000)
|
($2,500)
|
($2,500)
|
($2,500)
|
($2,500)
|
$25,000
|
a. Calculate the projected cash flows.
b. If the company requires a rate of return of at least 12% should it accept this project?
c. "Assume the following scenario:
i) SG&A increases by 20% in each year,
ii) Investment in equipment in Year 0 increases by 50%
Should the company accept the project in this scenario?
Note, the increase in the initial investment in equipment will require a corresponding change in the Depreciation. The equipment is depreciated in a straight-line and has no value remaining at the end of the project."