question archive LECTURE = FINANCIAL MANAGEMENT Your grandmother, who recently passed away, left you a legacy of $ 1,000,000 and advised you to make an industrial investment with her desire
LECTURE = FINANCIAL MANAGEMENT Your grandmother, who recently passed away, left you a legacy of $ 1,000,000 and advised you to make an industrial investment with her desire
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LECTURE = FINANCIAL MANAGEMENT
Your grandmother, who recently passed away, left you a legacy of $ 1,000,000 and advised you to make an industrial investment with her desire. Upon this, as a result of your feasibility study, you have determined that the XYZ investment is suitable; because you will also be able to benefit from government incentives. The feasibility study has also shown that your project, with an economic life of 5 years, provides $ 200,000, 250,000, 350,000, 450,000 and $ 400,000 cash flows annually and a scrap value of $ 200,000 at the end of its economic life. Assuming the required rate of return is 10%, calculate the discounted payback period and internal rate of return of your project.
Before starting the calculation, briefly summarize in a few sentences in which industry and where you make the investment and why you prefer this sector. Use the discount factors in itslearning to discount cash- flow and clearly show your transactions
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Answer:
I will invest in diversified portfolio which will offer withrange of equities and debt instrument and I'll trying to provide with long term investment securities along with debt instruments which are government bond and other corporate bonds which which will offer with a better risk-reward scenario and high rate of return by elimination of risk to a large extent.
Calculation of discounted payback period:
| Year | Cash flow | Present value factor@10% | Discounted cash flow | Cummulative discounted cash flow |
| 0 | -$1000,000 | 1 | -$1000,000 | -$1000,000 |
| 1 | $200,000 | 0.9091 | $181,820 | -$818,180 |
| 2 | $250,000 | 0.8264 | $206,600 | -$611,580 |
| 3 | $350,000 | 0.7513 | $262,955 | -$348,625 |
| 4 | $450,000 | 0.6830 | $307,350 | -$41,275 |
| 5 | $600,000 | 0.6201 | $372,060 |
Discounted payback period is:
=A+(B/C)
A=Last period with negative discounted cummulative cash flow
B=absolute Discounted cummulative cash flow during period A
C=discounted cash flow during the period following period A
Discounted payback period=4+($41,275/$372060)
=4+0.11=4.11 years
Calculation of IRR
IRR is the rate at which present value of future cash flow is equal to initial cash flow or is the rate at which NPV is zero.
Thus IRR is:
$1000,000=$200,000(1+IRR)^1+$250,000/(1+IRR)^2+$350,000/(1+IRR)^3+$450,000/(1+IRR)^4+$600,000/(1+IRR)^5
IRR=20.04%
