Question #162611

An Engineering Company is considering an investment proposal to install new milling controls. The project cost is `. 50,000. The facility has life of 5 years and no salvage value. The company’s tax rate is 55 %. The estimated cash flows before tax (CFBT) from the proposed investment proposal are as follows: 4

Year CFBT (`)

1 10,000

2 11,000

3 14,000

4 15,000

5 25,000

Compute the following:

i) Pay- Back Period

ii) Average rate of return

iii) Net present value at 10% discount rate

iv) Profitability index at 10% discount rate

Expert's answer

Answer:

Pay-back period is

= 3 years +

=3 years +

=3 years +0.25

= 3.25 years

Step 2 (ii) Calculation of Average rate of return-

=

=

=67%

Step 3 (iii) Calculation of NPV at 10% discount rate-

Step 4 (iv) Profitability Index @10%-

PI = = = 1.248

Therefore,

i) Payback period is 3.25 years.

ii) Average rate of return is 67%.

iii) NPV is 12,417.20

iv) PI is 1.248

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