A project proposal requiring P840,000 initial investment will result to annual cash return as follow: Year 1 P 55,000 Year 2 P 150,200 Year 3 P 275,000 Year 4 P 350,700 Year 5 P 245,000 Year 6 P 120,400 Required: a. If the current cost of funds is 8% and the decision criteria are the net present value and discounted payback, should the project be accepted? b. The project's payback period and internal rate of return?
A project proposal requiring P840,000 initial investment will result to annual cash return as follow: Year 1 P 55,000 Year 2 P 150,200 Year 3 P 275,000 Year 4 P 350,700 Year 5 P 245,000 Year 6 P 120,400 Required: a. If the current cost of funds is 8% and the decision criteria are the net present value and discounted payback, should the project be accepted? b. The project's payback period and internal rate of return?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
![**Project Proposal Analysis:**
### Introduction
A project proposal requires an initial investment of P840,000. The proposed project is expected to generate annual cash returns as follows:
- Year 1: P55,000
- Year 2: P150,200
- Year 3: P275,000
- Year 4: P350,700
- Year 5: P245,000
- Year 6: P120,400
### Required Analysis
To determine if this project is worth pursuing, we need to analyze the following aspects:
#### a. Net Present Value (NPV) and Discounted Payback Period
- **Cost of Funds:** 8%
- **Decision Criteria:** Should the project be accepted based on NPV and Discounted Payback Period?
#### b. Additional Financial Metrics
- **Payback Period:** The time it takes for cumulative cash flows to equal the initial investment.
- **Internal Rate of Return (IRR):** The discount rate that makes the NPV of all cash flows from the project equal to zero.
### Steps to Analyze the Project
#### Net Present Value (NPV)
NPV represents the difference between the present value of cash inflows and the initial investment. It can be calculated using the formula:
\[ NPV = \sum \left( \frac{R_t}{(1 + r)^t} \right) - C_0 \]
Where:
- \( R_t \) = Cash inflow at time \( t \)
- \( r \) = Discount rate
- \( t \) = Time period
- \( C_0 \) = Initial investment
#### Discounted Payback Period
The discounted payback period is the time it takes for the sum of the discounted cash flows to equal the initial investment. To calculate it, we discount each cash inflow and then determine how long it takes for the cumulative sum of discounted cash flows to cover the initial investment.
#### Payback Period
The payback period can simply be calculated by adding up the annual cash returns until the total equals the initial investment.
#### Internal Rate of Return (IRR)
IRR is the rate at which the NPV equals zero. It is calculated using iterative methods or financial calculators.
### Decision Criteria
- **NPV:** If NPV > 0, the project is considered financially viable.
- **Discounted Payback Period:** Should be within an acceptable timeframe as per](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3c9502c3-2aef-4bdd-a0f2-ac91bd82d702%2F1cfbfe75-34ff-402d-b158-94a547a0f7aa%2Fak12azd_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Project Proposal Analysis:**
### Introduction
A project proposal requires an initial investment of P840,000. The proposed project is expected to generate annual cash returns as follows:
- Year 1: P55,000
- Year 2: P150,200
- Year 3: P275,000
- Year 4: P350,700
- Year 5: P245,000
- Year 6: P120,400
### Required Analysis
To determine if this project is worth pursuing, we need to analyze the following aspects:
#### a. Net Present Value (NPV) and Discounted Payback Period
- **Cost of Funds:** 8%
- **Decision Criteria:** Should the project be accepted based on NPV and Discounted Payback Period?
#### b. Additional Financial Metrics
- **Payback Period:** The time it takes for cumulative cash flows to equal the initial investment.
- **Internal Rate of Return (IRR):** The discount rate that makes the NPV of all cash flows from the project equal to zero.
### Steps to Analyze the Project
#### Net Present Value (NPV)
NPV represents the difference between the present value of cash inflows and the initial investment. It can be calculated using the formula:
\[ NPV = \sum \left( \frac{R_t}{(1 + r)^t} \right) - C_0 \]
Where:
- \( R_t \) = Cash inflow at time \( t \)
- \( r \) = Discount rate
- \( t \) = Time period
- \( C_0 \) = Initial investment
#### Discounted Payback Period
The discounted payback period is the time it takes for the sum of the discounted cash flows to equal the initial investment. To calculate it, we discount each cash inflow and then determine how long it takes for the cumulative sum of discounted cash flows to cover the initial investment.
#### Payback Period
The payback period can simply be calculated by adding up the annual cash returns until the total equals the initial investment.
#### Internal Rate of Return (IRR)
IRR is the rate at which the NPV equals zero. It is calculated using iterative methods or financial calculators.
### Decision Criteria
- **NPV:** If NPV > 0, the project is considered financially viable.
- **Discounted Payback Period:** Should be within an acceptable timeframe as per
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