Posted: May 3rd, 2016

Calculate the Net Present Value of this project using the RADR calculated in Part 1?

The initial investment in the project is $45,000. The firm’s cost of capital is 12%, however projects in this risk class have a 14% required rate of return. The risk-free rate is 8%.

Year Cash Inflow
1 $23,000
2 19,000
3 15,000
4 13,000
5 $10,000

1. Use CAPM to calculate the Risk Adjusted Discount Rate to use to evaluate this proposed project.

2. Calculate the Net Present Value of this project using the RADR calculated in Part 1.

Question
(Part 1)
Using a 4.4% discount rate, calculate the Net Present Value, Payback, Profitability Index and IRR for each of the investment projects below (note, the inflows are for each year). Based on your calculations rank the projects and support you answer.

Project 1
Initial Invest= $505,000, Cash inflows of $105,000 for years 1-5 and $50,000 for years 6-10

Project 2
Initial Invest= $1,100,000, Cash inflows of $420,000 for years 1-3, $0 for years 4-7 and $250,000 for years 8-10.

Project 3
Initial Invest= $840,000, Cash inflows of $300,000 for years 1-5, $0 for years 6-9 and $100,000 for year 10.

(Part 2)
Assuming a budget of $1,200,000 what are your recommendations for the three projects in the above problem. Explain.

Assuming a budget of $2,000,000 what are your recommendations for the above problem? Explain.