Answered: Calculate the following project, at…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 14P

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Question

Calculate the following project, at cost of capital of 10%

Years Cash Flow (RM)
0 -10,000
1 2000
2 2000
3 4000
4 4000
5 5000
i) calculate NPV
ii) calculate PI
iii) Justified should we accept or reject the project?

Expert Solution

Part i-

NPV= Present value of cash flows – Initial Outlay

NPV = CF0 + CF1(1+rt)¹ + ··· + CFt (1+rt)^t

where,

CF= Cash Flow of various years

r= rate

t= time period

NPV= -10000/(1+0.10)⁰+ 2000/(1+0.10)¹+2000/(1+0.10)²+4000/(1+0.10)³+4000/(1+0.10)⁴+5000/(1+0.10)⁵

= $2,312.99

Part ii-

Profitability index (PI) is the present value of a project’s future cash inflows divided by the initial investment or cash outflow.

PI= 2000/(1+0.10)1+2000/(1+0.10)2+4000/(1+0.10)3+4000/(1+0.10)4+5000/(1+0.10)5/10000

PI= 12312.99/10000

PI= 1.2313

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