Question

# Your firm is considering an investment that will cost \$1.5 million...

Your firm is considering an investment that will cost \$1.5 million today today. The project will produce cash flows of \$350,000 in year 1, \$390,000 in years 2 through 4, and \$450,000 in year 5. (i) Develop the timeline (linear representation of the timing of cashflows). (ii) Calculate the Payback Period (PB). (iii) Calculate the Internal Rate of Return (IRR). (iv) Calculate the Net Present Value (NPV) at the following required rates of return: (a) 7% (b) 8% (c) 10% (d) 12% (v) Calculate the Profitability Index (PI) at the following required rates of return: (a) 7% (b) 8% (c) 10% (d) 12% (vi) Using IRR and NPV criterion, comment if the project should be accepted or rejected at the following required rates of return: (a) 7% (b) 8% (c) 10% (d) 12% (vii) Plot the Net Present Value profile (NPV on Y axis and rates of return on X-axis).

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