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Assignment on Payback Period

   

Added on  2021-02-02

10 Pages2388 Words118 Views
QUESTION 1 – For RFN PLC. (a)Payback period for PROJECT JDS.Initial cash outflow = ($650,000)Annual Cash Inflow (Year 1) = $250,000(Year 2) = $450,000(Year 3) = $170,000Using the Subtraction Method; In year 1, the cash inflow 250,000 can be removed from the initial cost 650,000completely, and there’d be a remainder of 400,000 on the negative side. In year 2 however, the cash inflow for the year of 450,000 cannot be removed from theremainder of 400,000 completely, as there’d be a positive remainder of 50,000. In light of this, the proportion of cash inflow used to cover the remaining cost of assetwould be found in months. This is done by dividing the cost-remainder by the cashinflow for the year. = 400000/450000= 0.89 years (rounded off to 2 decimal places). Therefore, the payback period for project JDS using the subtraction method is 1.89 years.Using the Averaging Method: Here, the cash inflows for the different years are all added up and averaged over thenumber of years for which cash flows are expected. Basically, it’s just the mean of theannual cash flows. This gives a constant annual cash inflow, which would be used todivide the initial cost of project JDS to get the payback period. Annual Cash Inflow = (250,000 + 450,000 + 170,000) / 3 years
Assignment on Payback Period_1
= 290,000 per yearPayback Period = Initial Cost of Investment / Annual Cash Inflow= 650,000 / 290,000= 2.24 years (rounded off to 2 decimal places)Therefore, the payback period for project JDS using the averaging method is 2.24 years. (b)Weighted Average Cost of Capital (W.A.C.C.) W.A.C.C. = (Weight of Equity Financing to Capital Structure * Cost of Capital) +(Weight of Debt Financing to Capital Structure * After-tax Cost of Debt) + (Weight ofPreference Share Capital to Capital Structure * Cost of preference share)For Project JDS – Using Excel FunctionsWeight of Debt Financing to Capital Structure 43%Weight of Equity Financing to Capital Structure 57.00%After-tax Cost of Debt 9%Cost of Equity 16%Weight of Equity Financing * Cost of Equity (A)9.1200%Weight of Debt Financing * After-tax Cost of Debt (B)3.8700%Weighted Average Cost of Capital (A+B)12.9900%The W.A.C.C. computed can be rounded off to the nearest whole number to give 13%(c)Net Present Value of Project JDS – Using Excel FunctionsYearCash Flows (A) Cost of CapitalDiscounting Factor (B) Present Value of Cash Flows (A*B) 0-650,0000.131-6500001250,0000.130.884955752221238.93812450,0000.130.783146683352416.00753170,0000.130.693050162117818.5276Net Present Value (NPV)41473.47316The Net Present Value figure can be rounded off to the nearest whole number to give$41,473
Assignment on Payback Period_2
(d)Internal Rate of Return for Project JDS – Using Excel Functions. YearsCash Flows (A) 0-650,0001250,0002450,0003170,000IRR0.505727547The internal rate of return is given as 50.57% when rounded off to 2 decimal places.
Assignment on Payback Period_3

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