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 8.5 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 14% pa. A salvage value of $200,000 is included in the cash flow for year five. Polycorp paid $200,000 for a feasibility study on the project about a year ago.
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Year
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Year One
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Year Two
|
Year Three
|
Year Four
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Year Five
|
|
Cash Inflow
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950,000
|
900,000
|
850,000
|
850,000
|
900,000
|
You are required to calculate:
(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 (AE or EAV)
(f) the payback in years (to one decimal place)
(g) the accounting rate of return (gross and net)
(h) PI (present value index or profitability index)
Is the project acceptable? Why or why not? Your answer should include an explanation of your treatment of the salvage value, the cost of the feasibility study, and the interest and repayments on the loan.