Conch Republic Electronics
Question 1
Payback period can be delineated as the time required to recover the amount of capital invested on a product (Ross, Westerfield & Jordan, 2008). Precisely, the payback period of a project determines the effectiveness of the project by estimating its lasting period. It is factual that long payback periods tend to be undesirable for investment on projects (Ross, Westerfield & Jordan, 2008). Unlike other techniques of budgeting, payback period tends to overlook the time value of capital. Citing from the fact that corporate finance is dominated by capital budgeting, it is factual that corporate financial analyst should have skills to value the project to be invested in. this means that it is the obligation of the analyst to figure out the most cost-effective project for the organization to invest in.
Therefore, payback period is calculated by dividing initial invest by annual payback. In this case, Conch Republic Electronics’ payback period for the project is as follows;
Operation cost for the project = 4.7 million
Fixed cost of PDA = 1.8 million
Payback period = 4,700,000/1,800,000
= 2.6 Years
Question 2
Profitability index refers to the ratio of costs and benefits of the investment in the proposed project (Ross, Westerfield & Jordan, 2008). Also known as value investment ration, profitability index helps the analyst quantify the amount generated by the invested project. It is factual that as the ratio in the profitability index increases, it indicates the attractiveness of the project with regard to the amount obtained from the investment. Thus, profitability index is calculated by dividing present value of future cash flows with initial investment. The profitability index of Conch Republic Electronics’ project is as follows;
PV of future cash flows = 4.7 million
Net present value = 4.7 – 4.1 = 0.6 million
Profitability index = 1 + (net present value/initial investment)
= 1 + (0.6/4.7)
= 1.13
Question 3
Internal rate of return is the discounted rate that quantifies the returns per dollar invested in the project (Ross, Westerfield & Jordan, 2008). Precisely, IRR determines the interest rate required to lower NPV to zero. This means that the required interest rate should balance the cash outflow with the cash inflow over a specific time.
IRR of the project = (PV inflow/1 + IRR) in five years – NPV
0 = -$32,500,000 + (4,371,738/1+IRR) + (13,481,238/1+IRR^2) + (16,601,488/1+IRR^3) + (17,439,238/1+IRR^4) + (12,480 ,038/1+IRR^5) = 0.291
% IRR = 29.1
Question 4
NPV of the project = PV inflow in five years - PV outflow
= (4.7 x 5) – 4.1
= 19.4 million
Reference
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Ross, S. A., Westerfield, R., & Jordan, B. D. (2008). Fundamentals of corporate finance. New Delhi: McGraw-Hill Publishing Company Ltd.
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