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Along with that Kencan has been presented with an investment opportunity into Europe which will yield cash flows of $34,000 per year starting from 2019, Years 1 through 4, $35,000 per year in Years 5 through 9, and $45,000 in Year 10
Along with that Kencan has been presented with an investment opportunity into Europe which will yield cash flows of $34,000 per year starting from 2019, Years 1 through 4, $35,000 per year in Years 5 through 9, and $45,000 in Year 10. This investment will cost the firm $130,000 today, and the firm's cost of capital is 9.5 percent with the assumption that the cash flows occur evenly during the year.
1)Calculate the payback period for Kencan Investment into Europe. (5 marks)
2)Calculate the Net Present Value (NPV) of Kencan Investment into Europe. (5 marks)
3)Calculate the Profitability Index (PI) of Kencan’s Investment into Europe. (2 marks)
4) Calculate the Internal Rate of Return (IRR) of Kencan’s Investment into Europe.
Expert Solution
1. Payback period is the time it takes to retain the initial cost of investment
It receives102,000 in 3 years and the remaining 28,000 (130,000-102,000) in 4th year
In 4th year=28,000/34000=0.82
The payback period=3.82 years
| cost of capital | 9.5% |
| Cashflows | |
| Year0 | -130000 |
| Year1 | 34000 |
| Year2 | 34000 |
| Year3 | 34000 |
| Year4 | 34000 |
| Year5 | 35000 |
| Year6 | 35000 |
| Year7 | 35000 |
| Year8 | 35000 |
| Year9 | 35000 |
| Year10 | 45000 |
| NPV | 90588.59 |
| PI | 1.70 |
| IRR | 23.42% |
2. Use NPV function in EXCEL to find the NPV
=NPV(rate,Year1 to Year10 cashflows)-Year0 cashflow
=NPV(9.5%,Year1 to Year10 cashflows)-130000=$90588.59
3. Use NPV function to find PI
PI=NPV(9.5%,Year1 to Year10 cashflows)/130000=1.70
4. Use IRR finction in EXCEL
=IRR(Year0 to Year10 cashflows)=23.42%
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