Answer to Question #162611 in Other for Neha Daniel

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



1
Expert's answer
2021-02-11T05:06:04-0500

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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