question archive 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
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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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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I will invest in the Agriculture Industry. Firstly this industry never goes low on demand. There is high demand for foodgrains and other products. Government incentives are available for exports. There are new technological innovations in this industry which are yet untapped and so there is huge potential for growth.
Analysis follows
| Year | Cash flows | Discount factor | DCF | Cumulative DCF |
| 0 | -1000000 | 1.0000 | -1,000,000.00 | -1,000,000.00 |
| 1 | 200000 | 0.9091 | 181,818.18 | -818,181.82 |
| 2 | 250000 | 0.8264 | 206,611.57 | -611,570.25 |
| 3 | 350000 | 0.7513 | 262,960.18 | -348,610.07 |
| 4 | 450000 | 0.6830 | 307,356.05 | -41,254.01 |
| 5 | 600000 | 0.6209 | 372,552.79 | 331,298.78 |
| IRR | 20.04% | |||
| Discounted payback | 4.11 |
The IRR is 20.04% and Discounted payback=4.11 years
Workings
IRR is computed using IRR function
Discounted payback=Year in which Discounted Cumulative CF is last negative -(Last negative discounted cumulative CF/ CF of next year)
please see the attached file for the complete solution
