Managerial Finance: Project Evaluation

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

Question 1
a) The company (RWE Enterprises) plans to undertake a new project whereby a plant would
be set up. Based on the details provided, it is apparent that the project would lead to the
following cash flows.
 Initial outlay at t=0 is $ 3 million
 Subsequent annual cash inflow (post tax) of $ 0,7 million
 Refurbishment cash outflow of $ 2 million at t =5
 Scrap value (post tax) inflows of $ 0.2 million at t =10
The above projects details will lead to the following incremental project related cash flows.
b) For the given project, the applicable discount rate is 10%. The present value the cash flows
has been estimated and used to derive the NPV as showcased below.

The computation leads to a positive NPV ($0.14 million) which implies that accepting the
project would be beneficial for the shareholders (Northington, 2015).
c) The objective is to compute the IRR which is referred to as the discount rate that yields
NPV as zero. The computation in this regards yields the NPV as 11.04% as apparent from
the table below.
Based on IRR, the project would be accepted since the discount rate applicable for the new
plant project is 10% and hence lower than IRR computed (Brealey, Myers and Allen, 2015).
The profitability index computation is executed in line with the formula stated below
(Damodaran, 2015).
As the profitability index tends to be cross the hurdle rate of 1, hence the new plant is
financially feasible as per this criterion.
d) The payback period is defined as the time required for the initial investment recovery.
Using the table highlighted below, payback period computation has been performed.