1. Complete Table 1 by adding the cash flows for Years 4 & 5. Cash Flow Analysis 1 2 3 5 Land Opportunity Cost (500,000) Building/Equipment Cost (10,000,000) Net Revenues 5,000,000 $ 5,150,000 $ 5,304,500 $ 5,463,635 $ 5,627,544 Less: Labor Costs 800,000 $ 824,000 5 848,720 $ 874,181 $ 900,407 Utilities Costs 50,000 $ 51,500 5 53,045 $ 54,636 $ 56,275 Supplies 2,000,000 $ 2,060,000 $ 2,121,800 $ 2,185,454 $ 2,251,018 Incremental Overhead 36,000 S 37,080 5 38,192 5 39,338 $ 40,518 Net Income 2,114,000 $ 2,177,420 $ 2,242,743 $ 2,310,025 $ 2,379,326 Plus: Net Land Salvage Value $ 500,000 Plus: Net Building/Equipment Salvage Value $ 5,000,000 Net Cash Flow $ (10.500.000) 5 2.114.000 $ 2.177.420 |5 2.242.743 5 2.310.025 5 7.879.326 2. What is the project's payback, NPV, and IRR? Interpret each of these measures. Year Net Cash Flow (Calculations) PV Still Owes 0 $ (10,500,000) $ (10,500,000) $ (10,500,000) 1 2,114,000 2114000/1.10^1 $ 1,921,818 $ (8,386,000) 2 S 2,177,420 2177420/1.10*2 $ 1,799,521 $ (6,208,580) 3 S 2,242,743 2242743/1.10*3 1,685,006 $ (3,965,837) 4 S 2,310,025 2310025/1.10^4 $ 1,577,778 $ (1,655,812) S 7,879,326 7879326/1.10^5 $ 4,892,442 $ 6,223,514 Cost of Capital 10%% or 0.1 Payback 4+ 1655812/4892442 = 4.34 Years NPV $ 1,376,564 IRR 14% As you can see in the calculations above, the payback of this project is roughly 4.34 years, or 4 years and 3 months. Because the payback period is less than the life of the project as a whole, based on payback the project should be accepted. As for NPV, the net present value for this project is $1,376,564 and is positive. This means that the project is profitable even if we take into account the amount of time it will take. Finally, the IRR is 14% which is higher than the cost