Comparing all methods Risky Business is looking at a project

Comparing all methods. Risky Business is looking at a project with the estimated cash flow as? follows: Initial investment at start of? project:???$12 comma 600 comma 000 Cash flow at end of year? one:???$2 comma 268 comma 000 Cash flow at end of years two through? six:???$2 comma 520 comma 000 each year Cash flow at end of years seven through? nine:???$2 comma 948 comma 400 each year Cash flow at end of year? ten:???$2 comma 268 comma 000 Risky Business wants to know the payback? period, NPV,? IRR, and PI of this project. The appropriate discount rate for the project is 11?%. If the cutoff period is six years for major? projects, determine whether the management at Risky Business will accept or reject the project under the five different decision models. What is the payback period for the new project at Risky? Business? 6.94 years???(Round to two decimal? places.) Under the payback? period, this project would be rejected rejected accepted . ?(Select from the? drop-down menu.) What is the NPV for the project at Risky? Business? ?$ nothing???(Round to the nearest? cent.) Under the NPV? rule, this project would be ? . ?(Select from the? drop-down menu.) What is the IRR for the new project at Risky? Business? nothing?% ?(Round to two decimal? places.) Under the IRR? rule, this project would be ? accepted rejected . ?(Select from the? drop-down menu.) What is the PI for the new project at Risky? Business? nothing???(Round to two decimal? places.) Under the PI? rule, this project would be ? rejected accepted . ?(Select from the? drop-down menu.)

Solution

Calculating Payback period

By the end of 5th year we still have a negative balance of -252000, which will be recoverd from 6th year cash flow of 2520,000.

So payback period = 5 years + 252000 / 2520000 = 5.10 years

CALCULATION OF NPV

CALCULATION OF IRR

Now use the simple interpolation technique to find out the IRR

15 ........... 188,750

X ......... 0 ( NPV should be zero at IRR)

16 .......... - 299730

( X - 15 ) / ( 16 - 15) = ( 0 - 188750) / ( - 299730 - 188,750)

(X - 15 ) / 1 = - 188750 / - 488480 = 0.39

X = 15.39 %

CALCULATION OF PI ( Profitability Index)

PI = 1 + NPV / INVESTMENT = 1 + 2484795.9 / 12600000 = 1.20

What is the payback period for the new project at Risky? Business? = 5.10 Years

Under the payback? period, this project would be accepted .

What is the NPV for the project at Risky? Business? ?$ 2484795.9

Under the NPV? rule, this project would be Accepted

What is the IRR for the new project at Risky? Business? 15.39%

Under the IRR? rule, this project would be accepted

What is the PI for the new project at Risky? Business? 1.20

Under the PI? rule, this project would be accepted