Managerial Finance Solved Assignment

MANAGERIAL
FINANCE
Task 2 – Project Evaluation
STUDENT ID:
[Pick the date]

Question 1
a) In accordance with the information provided, it is apparent that $ 3 million is the initial
investment. Also, based on the information provided in relation to the expected cash
inflows along with the scrap value at project end, the following summary can be drawn.
b) Using the discount as 10%, the NPV of the given project is computed in the tabular
manner highlighted as follows.
Considering that project NPV is positive ($0.14 million), therefore the project should be
accepted as it would result in value creation for the shareholders (Damodaran, 2014).

c) The discount rate at which NPV value becomes zero is called IRR and the relevant
computation is highlighted below.
The project IRR is 11.04%. It is greater than the project’s cost of capita and hence it may be
derived that the project is feasible in accordance with IRR criterion (Petty et. al., 2015).
For computing the profitability index, the following formula can be used (Brealey, Myers and
Allen, 2015).
In case of the project, initial investment required is $ 3 million
Also, the future cash inflows over the project useful life have a present value of $ 3.14
million.
Therefore, PI= (3.14/3) = 1.047
Considering the value of PI exceeds one, the financial feasibility of the project is reflected.
d) The amount of time that is required to recoup the starting investment is referred to as the
payback period.
The payback period can be computed with the help of the table illustrated below.