Financial Analysis, Payback Period, ROI, NPV, and IRR Calculation

This assignment provides a comprehensive financial analysis of an investment project. It includes the calculation of key financial metrics such as payback period, both in its basic and discounted forms, average annual profits, and the rate of return on both original and average investments. The assignment also calculates the Net Present Value (NPV) and Internal Rate of Return (IRR) of the investment. The analysis involves detailed cash flow projections over a five-year period, considering depreciation and tax implications. The solution demonstrates the application of these financial tools to evaluate the project's profitability and financial viability, aiding in investment decision-making. The document showcases different methods for assessing investment returns, providing a clear understanding of the project's financial performance under various scenarios.

Year
Profit
before tax Tax Profit after tax Depreciation
Cash
flows
Cumulative
Cash flows
Discounted
cash flows @
10%
1 100,000 50,000 50,000 40,000 90,000 90,000 81,818.18
2 100,000 50,000 50,000 40,000 90,000 180,000 74,380.17
3 80,000 40,000 40,000 40,000 80,000 260,000 60,105.18
4 80,000 40,000 40,000 40,000 80,000 340,000 54,641.08
5 40,000 20,000 20,000 40,000 60,000 400,000 37,255.28
200,000 200,000 200,000 400,000 1,270,000 308,199.89
(a)
Payback period = 2 + ((200000 - 180000)/ 80000)
= 2.25 years
(b)
Average Annual profits = 200,000 / 5
= 40,000
Rate of return on original investment method = 40,000 / 200,000
= 20.00%
(c)
Average Annual Return = 200,000 / 5
= 40,000
Average Investment = 200,000 / 2
= 100,000
Rate of return on average investment method = 40,000 / 100,000

= 40.00%
(d)
Payback period (discounted cash flows) = 2 + ((200000 - 156198.35)/ 60105.18)
= 2.73 years
(e)
Year
Cash
flows
Discounted
cash flows @
10%
0
-
200,000
-
200,000.00
1 90,000 81,818.18
2 90,000 74,380.17
3 80,000 60,105.18
4 80,000 54,641.08
5 60,000 37,255.28
200,000 108,199.89
Net present value (NPV) = 108,199.89
(f)
Year
Cash
flows
Discounted
cash flows @
30%
Discounted
cash flows @
31%
0
-
200,000
-
200,000.00
-
200,000.00
1 90,000 69,230.77 68,702.29
2 90,000 53,254.44 52,444.50
3 80,000 36,413.29 35,585.75
4 80,000 28,010.22 27,164.69
5 60,000 16,159.74 15,552.31

200,000 3,068.47
-
550.47
Internal rate of return (IRR) = 30% + (31% - 30%) (3068.47 / (3068.47 +
550.47)
= 30.85%