Projects cash flows before loan repayments

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Reference no: EM13207858

Polycorp 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 the next five years in equal annual end of year instalments at a rate if 9 percent pa. Assume straight-line depreciation over a five-year life, and no taxes. The projects cash flows before loan repayments and interest are shown in the table below. Cost of capital is 15.5% pa (the required rate of return on the project). A salvage value of $200,000 is expected at the end of year five and this salvage value is already included in the year five cash flows in the table below. Ignore taxes and inflation.

Year

Year One

Year Two

Year Three

Year Four

Year Five

Cash Inflow

900,000

950,000

850,000

950,000

950,000

You are required to calculate:

(1) The annual loan repayment

(2) NPV of the project

(3) the IRR of the project

(4) the annual equivalent for the project(AE or EAV)

(5) the payback in years (to one decimal place)

(6) the accounting rate of return (gross)

(7) PI (present value index or profitability index)

(8) Is the project acceptable? Why or why not (provide a full explanation)?

Reference no: EM13207858

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