Financial Management

Jun 17th, 2015
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University of New Orleans
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Using a 5% discount rate, calculate the Net Present Value, Payback, Profitability Index, and IRR for each of the investment projects below (note, the inflows are for each year). Based on your calculations rank the projects and support you answer.

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a. According to the given information revenue in the first year is \$ 950,000 and \$1,500,000 per year from 2 to 8 years. Direct cost is 45% of sales and will be computed for first year as \$ 950,000 *45% = \$ 427,500 and 1,500,000 *45% = \$ 675,000 from year 2 to 8. Indirect cost is \$95,000 from year 1 to 8. Initial Investment is the cost of new plant i.e. \$1,500,000 depreciated by straight line method over 5 years. Depreciation per year = \$1,500,000 / 5 = \$ 300,000 for each of the 5 year. After 5th year depreciation will be zero. Tax calculationTax 1st year = (\$950,000 \$427,500-\$95,000-\$300,000)*35% = \$44,625 Tax from year 2 to 5 = (\$1,500,000 \$675,000-\$95,000-\$300,000)*35% = \$150,500 Tax from year 6 to 8 = (\$1,500,000 \$675,000-\$95,000)*35% = \$255,500Cash flow from operations Cash flow from operations = Revenues - Expenses - TaxesChange in Working CapitalThe initial

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