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?
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?
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
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
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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