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1) Excel inc, is considering the investment in latest plant= $3 million. Project will be financed with the loan= $2,000,000 which will be repaid over next five years in equivalent annual end of year instalments at the rate of 6.5 percent pa. Suppose straight-line depreciation over the five-year life, and no taxes. Projects cash flows before loan repayments and interest are given in the table below. Cost of capital= 13.35% pa (necessary rate of return on the project). Salvage value= $200,000 is expected at the ending of year five and is included in = cash flows for year five below. Avoid taxes and inflation.

Year                 Cash Inflow
Year One            850,000
Year Two            900,000
Year Three          800,000
Year Four           900,000
Year Five            950,000

You are needed to compute:

(i) The annual loan repayment and a repayment schedule.

(ii) NPV of the project

(iii) the IRR of the project

(iv) AE, annual equal for the project(AE or EAV)

(v) PB, the payback in years (to one decimal place)

(vi) ARR, the accounting rate of return (gross)

(vii) PI (present value index or profitability index)

(viii) Is project acceptable? You should provide the decision for each of methods in parts (ii) to (vii). describe why or why not (give full description)?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914208

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