Polycorp is considering an investment in new plant of $3 million. The project will be financed with a loan of $2,000,000 which will be repaid over the next five years in equal annual end of year instalments at a rate if 8 percent pa. Assume straight-line depreciation over a five-year life, and no taxes. The projects cash flows before loan repayments and interest are shown in the table below. Cost of capital is 14% pa (the required rate of return on the project). A salvage value of $200,000 is expected at the end of year five. Ignore taxes and inflation.
|
Year
|
Year One
|
Year Two
|
Year Three
|
Year Four
|
Year Five
|
|
Cash Inflow
|
900,000
|
950,000
|
800,000
|
950,000
|
900,000
|
You are required to calculate:
(1) NPV of the project
(2) the IRR of the project
(3) the annual equivalent for the project(AE or EAV)
(4) the payback in years (to one decimal place)
(5) the accounting rate of return (gross)
(6) PI (present value index or profitability index)
(7) Is the project acceptable? Why or why not (provide a full explanation)?
Project 2
Given below are the cash flows for two mutually exclusive projects, with unequal lives and replication.
|
|
0
|
1
|
2
|
3
|
|
A
|
(100)
|
80
|
70
|
|
|
B
|
(200)
|
120
|
100
|
60
|
Assume a cost of capital of 10% pa.
(1) Calculate the NPV of each project
(2) Calculate the annual equivalent of each (AE or EAV)
(3) Which project should be selected? Why (provide a full explanation)?