Question 8

A telecommunications company is evaluating a project with an initial outlay of $220,000. The forecasted net cash flows are given below. The company's cost of capital is 10%. Calculate and comment on the project's NPV, IRR, and profitability index.

• Year 1: Cash Flows = $55,000, Discount Factor = 0.909
• Year 2: Cash Flows = $60,000, Discount Factor = 0.826
• Year 3: Cash Flows = $65,000, Discount Factor = 0.751
• Year 4: Cash Flows = $70,000, Discount Factor = 0.683
• Year 5: Cash Flows = $75,000, Discount Factor = 0.621
• Salvage Value: $40,000, Discount Factor = 0.621

Requirements:

1. Calculate the Net Present Value (NPV).
2. Determine the Internal Rate of Return (IRR).
3. Compute the profitability index.
4. Assess the investment based on the calculated values.