Answer:
Payback Period: 11 Years
Net Present Value: $123,055
Profitability Index: 0.45
Internal rate of return: 53.48%
Annual rate of return: 38.18%
Explanation:
<u>Payback Period:</u>
The Cash Payback Period can be calculated from the following formula, when the cash inflows are even Cash flows:
Payback Period = Investment / Even Cash flow
Here total annual even cash flow = $25,000 + $80,000 = $105,000
By putting values, we have:
Payback Period = $275,000 / $25,000 = 11 Years
<u>Net Present Value:</u>
As we know:
Net present Value = Present Value of Cash inflow - Present Value of Cash Outflow
Here
Present Value of Cash Inflow = Even Cash flow * Annuity Factor
By putting values:
Present Value of Cash Inflow = $105,000 * 3.791 = $398,055
Now Present value of cash outflow which is investment will the same because the money is invested in the year zero.
Which means:
Net present Value = $398,055 - 275,000 = $123,055
<u>Profitability Index:</u>
The profitability Index can be calculated using the following formula:
PI = NPV / Investment
So by putting values, we have:
PI = $123,055 / $275,000 = 0.45
<u>Internal rate of return:</u>
At 10%, NPV is $123,055 so all we have to do is to use a higher cost of capital to find using the formula at the end, the breakeven rate of return at which NPV is zero.
So I choose 20%.
At 20%, annuity factor is 2.990 which is approximately 3.
So
NPV = $125,000 * 3 - $275,000 = $100,000
By putting values in the following formula:
IRR = Lower Percentage + (Higher percentage - Lower percentage) * (NPV at Higher Percentage) / (NPV at lower - NPV at higher)
By putting values, we have:
IRR = 10% + (20% - 10%) * ($100,000) / ($123000 - $100,000)
IRR = 10% + 10% * 4.348 = 53.48%
<u>Annual rate of return:</u>
Annual rate of return can be calculated using the following formula:
Annual rate of return = Earnings Before Interest and tax / Investment
Here
Earnings before interest and tax is $105,000
So by putting formula, we have:
Annual rate of return = $105,000 / $275,000 = 38.18%
