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VU MGT201 Assignment 1 Complete solution Spring 2013

VU MGT201 Assignment 1 Complete Solution Spring 2013

Calculation of payback period.

Year

Cash flows

Commutative cash flows

0

-50000

1

-800000

2

150000

1500000

3

200000

350000

4

250000

600000

5

300000

900000

6

300000

1200000

7

300000

1500000

8

300000

1800000

9

300000

2100000

10

30000

2400000

 

Payback period= 6 + 100000/300000

= 6.33 years

This project is not feasible because its payback period is greater than firm’s required payback period.

 

 

b) Calculation of NET PRESENT VALUE

Year Cash flow Cum cash flow PV @14% Present value
0 (500000) 1.00 (500000)
1 (800000) 0.877 (701600)
2 150000 150000 0.769 115350
3 200000 350000 0.675 135000
4 250000 600000 0.592 148000
5-10 300000 240000 2.304 691200

                                                                                        Net present value (-112050)

 

NPV is negative so project is not acceptable

 

 

 

 

 

C ) What is the internal rate of return for the project? Is it acceptable? Support your decision with conceptual rationale

 

Years Cash flows PV @ 11% discount PV @ 10% discount

0

-500000

1

-800000

2

150000

121743.37

123966.94

3

200000

146238.27

150262.96

4

250000

164682.74

170753.36

5

300000

178035.39

186276.39

6

300000

160392.25

169342.17

7

300000

144497.52

153947.43

8

300000

130177.94

139952.2

9

300000

117277.43

127992.28

10

300000

105655.34

115662.986

 

NPV @ 11% discount = -31299.75

NPV @ 10% discount = 37393.7

IRR= Lower discount rate+ Difference of discount rates (NPV at lower discount rate/NPV at lower discount rates- NPV at higher discount rate

IRR= 11+1(37393.7/37397.3+31299.75)

IRR=11+ (0.5443)

IRR=11.54%

 

Because the internal rate of return is less than the required rate of return the project would not be acceptable.

 

VU MGT201 Assignment 1 Complete Solution Spring 2013

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