Question

3. You are contemplating the introduction of a new product. The new product will require a net investment (NINV) of $1,000. The cash outflow associated with the NINY will occur today. You estimate the following additional cashflows associated with the new product: Year 1 Year 2 Year 3 Year 4 Year 4 NCF1 NCF2 NCF3 NCF4 Terminal Cashflow4 $ 400. $ 500. $ 200. $ 300. $ 100. The project's required return is 13%.. a. Calculate the project's net present value (NPV).. b. Calculate the project's profitability index (PI). C. Calcolate the project's internal rate of return (IRR).. d. Calculate the project's payback period..

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows

Year	CF	PVF @13%	Disc CF
0	$ -1,000.00	1.0000	$ -1,000.00
1	$     400.00	0.8850	$     353.98
2	$     500.00	0.7831	$     391.57
3	$     200.00	0.6931	$     138.61
4	$     300.00	0.6133	$     184.00
4	$     100.00	0.6133	$        61.33
NPV			$     129.49

PI = PV of Cash Inflows / PV of Cash Outflows

Year	CF	PVF @13%	Disc CF
1	$     400.00	0.8850	$     353.98
2	$     500.00	0.7831	$     391.57
3	$     200.00	0.6931	$     138.61
4	$     300.00	0.6133	$     184.00
4	$     100.00	0.6133	$        61.33
PV of Cash Inflows			$ 1,129.49
PV of Cash Out flows			$ 1,000.00
PI			1.13

IRR is the Rate at which PV ofCash Inflows are equal to PV of Cash Outflows.

Year	CF	PVF @19%	Disc CF	PVF @20%	Disc CF
0	$ -1,000.00	1.0000	$ -1,000.00	1.0000	$ -1,000.00
1	$     400.00	0.8403	$     336.13	0.8333	$     333.33
2	$     500.00	0.7062	$     353.08	0.6944	$     347.22
3	$     200.00	0.5934	$     118.68	0.5787	$     115.74
4	$     300.00	0.4987	$     149.60	0.4823	$     144.68
4	$     100.00	0.4987	$        49.87	0.4823	$        48.23
NPV			$          7.37		$      -10.80

IRR = Rate at which least +ve NPV + [ NPV at that Rate / CHange in NPV due to 1% ionc in Disc rate ] * 1%

= 19% + [ 7.37 / 18.17 ] * 1%

= 19% + 0.41%

= 19.41%

Payback period is the period in which initial investment is recovered.

Year	Opening Bal	CF	Clsoing Bal
1	$ 1,000.00	$ 400.00	$ 600.00
2	$    600.00	$ 500.00	$ 100.00
3	$    100.00	$ 200.00	$ -100.00
4	$ -100.00	$ 400.00	$ -500.00

PBP = Year in which least +ve CB + [ CB in that Year / CF in Next Year ]

= 2 + [ 100 / 200 ]

= 2 + 0.5

= 2.5 Years