FIN500: Principles of Finance

Module 12 Critical Thinking Assignment

Problem 12-1: Net Present Value (NPV) and Internal Rate of Return

A firm is considering a major expansion that will cost SAR 22,000,000.

Annual cash flows from the project are expected to be SAR 4,000,000 for 10 years.

The firm uses a discount rate of 12%.

Calculate the Net Present Value (NPV) and the Internal Rate of Return of the project and determine if the project is acceptable based on NPV and IRR decision criteria.

Data

Discount Rate 12%

Initial outlay 22000000

Cash Flow 1 4000000

Cash Flow 2 4000000

Cash Flow 3 4000000

Cash Flow 4 4000000

Cash Flow 5 4000000

Cash Flow 6 4000000

Cash Flow 7 4000000

Cash Flow 8 4000000

Cash Flow 9 4000000

Cash Flow 10 4000000

Data

Initial outlay -22000000

Cash Flow 1 4000000

Cash Flow 2 4000000

Cash Flow 3 4000000

Cash Flow 4 4000000

Cash Flow 5 4000000

Cash Flow 6 4000000

Cash Flow 7 4000000

Cash Flow 8 4000000

Cash Flow 9 4000000

Cash Flow 10 4000000

Problem 12-2: Profitability Index (PI) and Payback Period

A firm is considering a major expansion that will cost SAR 15,000,000.

Annual cash flows from the project are expected to be SAR 3,975,000 for 7 years.

The firm uses a discount rate of 8%. It accepts the project if the projects payback is less than 6 years.

Calculate the Profitability Index (PI) and the Payback Period of the project and determine if the project is acceptable based on PI and the Payback Period decision criteria.

Data

Discount Rate 7%

Initial outlay 18500000

Cash Flow 1 3500000

Cash Flow 2 3500000

Cash Flow 3 3500000

Cash Flow 4 3500000

Cash Flow 5 3500000

Cash Flow 6 3500000

Cash Flow 7 3500000

Cash Flow 8 3500000

Cash Flow 9 3500000