Question

Project 1 (half a mark for each part: You must show your working to receive full marks) 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 installments at a rate if 9.5 percent pa. Assume straight-line depreciation over a five-year life, and no taxes. The projects cash flows before loan repayments and interest have been deducted are shown in the table below. Cost of capital is 14.5% pa (the required rate of return on the project).A salvage value of $200,000 is expected at the end of year five and is not included in the cash flows for year five below. Ignore taxes and inflation.


You are required to calculate:
(1) The annual loan repayment
(2) Loan repayment schedule showing principle and interest components
(3) NPV of the project
(4) The IRR of the project (your answer should include at least one manual trial to demonstrate that you understand the concept)
(5) AE, the annual equivalent for the project (AE or EAV)
(6) PB, the payback and discounted payback in years (to one decimal place)
(7) ARR, the accounting rate of return (net and gross)
(8) PI (present value index or profitability index)
(9) Is the project acceptable? Provide the decision rule for each of the methods above.
(10) Why or why not (provide a fullexplanation)?


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  • CreatedJuly 26, 2013
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