MGT201 Assignment no 01 Idea Solution has been Upload

 

a)            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.