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
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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 to discount cash- flow and clearly show your transactions.
I will be advising them to invest money in portfolio of various different asset class which will diversify the unsystematic risk and provide you with a better portfolio which can perform sustainable through various different economic cycles.
The discounted payback period will be the payback period within which the initial investment will be realised.
Cash inflows in first 4 years= (200000/1.1)+(2,50,000/(1.1)^2+(350000/(1.1)^3+(450,000/(1.1)^4)= 9,58,746.
Discounted payback period= (4+(1000000-958746)/(400000/(1.1)^5)
= 4.17 years.