### Computing amount of the loan repayments

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##### Reference no: EM1310402

1) XYZ Ltd is considering an investment in new plant of \$3 million. The project will be financed with a loan of= \$2,000,000 which will be repaid over next 5 years in equal annual end of year instalments at a rate of 9% pa. Suppose straight-line depreciation over 5-year life, and no taxes. Projects cash flows before loan repayments and interest are given in table below. Cost of capital is 13%. Salvage value of= \$200,000 is included in cash flow for year 5. XYZ Ltd paid= \$200,000 for feasibility study on project about a year ago.

Year             Year One   Year Two  Year Three  Year Four  Year Five
Cash Inflow   900,000    950,000    800,000     950,000    900,000

You are needed to compute:

a) The amount of the loan repayments
b) Repayment schedule showing the annual interest component in the repayments
c) NPV of the project
d) The IRR of the project
e) The annual equivalent benefit (AE or EAV)
f) The payback and discounted payback
g) The accounting rate of return (gross and net)
h) PI (present value index or profitability index, sometimes called benefit/Cost Ratio)

Is project good enough? Describe why or why not? Your reply must comprise the explanation of the treatment of salvage value, cost of feasibility study, and interest and repayments on loan.

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