ACCT 6311-You have a project with the following cash flow stream

by | Mar 18, 2020 | Uncategorized

  

1. You have a project with the following cash flow stream(assume a10% discount rate). What is the profitability index of the project? Is it acceptable?

Initial investment ($76,000)

Year 1 $20,000

Year 2 $20,000

Year 3 $20,000

Year 4 $22,000

Year 5 $32,000

Disinvestment ($4,000) at Year 5

Part A: Calculate the profitability index for this project

Part B: Is the project favorable? Why or why not?

2. An investment opportunity costing $85,000 is expected to yield net cash flows of $15,000 annually over six years.

Part A: Calculate the Net Present Value of the investment at a discount rate of 12%.

Part B: Does the capital expenditure appears to be a favorable investment? Why or Why not?

3. Smith Company has an investment opportunity to purchase a new machine costing $75,000 that is expected to yield the following net cash flows over the next five years:

Year 1: $15,000

Year 2: $30,000

Year 3: $45,000

Year 4: $30,000

Year 5: $15,000

In year 5, Smith Company can get salvage value on the machine 5,000. Find the NPV of the investment at a discount rate of 10%. Should you accept this project? Why or why not?

4.

ETP Co. has an investment opportunity costing $80,000 that is expected to yield the following cash flows over the next ten years:

Year 1: $15,000

Year 2: $15,000

Year 3: $15,000

Year 4: $15,000

Year 5: $15,000

Year 6: $15,000

Year 7: $13,000

Year 8: $14,000

Year 9: $16,000

Year 10: $12,000

Part A:Find the Net Present Value (NPV) and Profitability Index (PI) of the investment at a discount rate of 10%.

Part B:Does this capital project appear to be a favorable investment?Why or Why not?

Part C:If a second project (X) with a profitability index of 1.85 was also being considered, which project (ETP or X) would be best and WHY?

  

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