Green Leaf Inc.is considering the purchase of a new piece of equipment for $30,000.The projected after-tax net income per year on this investment is estimated to be $5,000.The firm uses straight-line depreciation.This asset is expected to have a useful life of 5 years and no salvage value at the end of its useful life.Management of the company considers a 10% return on investment to be satisfactory.The present value factor for 10%,5 years = 0.621,while the present value annuity factor for 5 years at 10% is 3.791.
Required:
1.What is the estimated net present value (NPV)of the machine?
2.What is the profitability index (or,present value index),PI,for this proposed investment?
3.For what purpose is the profitability index (PI)useful,in a capital budgeting context?
4.Use the built-in function in Excel to estimate this project's internal rate of return (IRR).
5.Use the built-in function in Excel to estimate the project's modified internal rate of return (MIRR)under the assumption that the interim cash flows from the investment generate a rate of return of: (a)10%,and (b)20%.
6.How does the MIRR measure differ from the conventional IRR calculation?

Question

Quizplus · Accepted Answer

Feedback: 1. 11ea6e70_bd06_4a85_8f54_6581d4706bbb_TB1699_00 * The present value annuity factor of 10% for 5 years can be calculated using the following formula: (1 - (1/1.10⁵))/0.10 $\approx$3.791. 2.The profitability index (PI)for a proposed investment = NPV/Initial investment outlay = $11,701/$30,000 = 0.39 3.The profitability index,PI,of a proposed investment is a rate of return measure for the project.Specifically,it is the ratio of NPV to the original investment outlay.In this sense,it is a relative (not absolute)measure of project profitability.As such,it is useful for determining an optimal capital budget when under conditions of capital rationing. 4.The internal rate of return (IRR)on the proposed investment is 24.32%,as follows: = IRR({-30000;11000;11000;11000;11000;11000})Note: in this formula,data were entered as an array. 5.The appropriate built-in function in Excel is MIRR,as follows: MIRR(values,finance_rate,reinvest_rate) Valuesis an array or a reference to cells that contain numbers.These numbers represent a series of payments (negative values)and income (positive values)occurring at regular periods.Values must contain at least one positive value and one negative value to calculate the modified internal rate of return.Otherwise,MIRR returns the #DIV/0! error value.If an array or reference argument contains text,logical values,or empty cells,those values are ignored;however,cells with the value zero are included. Finance_rate is the interest rate you pay on the money used in the cash flows. Reinvest_rate is the interest rate you receive on the cash flows as you reinvest them. (a)Given a discount rate of 10% and an assumed reinvestment rate of 10%,the estimated MIRR of this project is 17.5% (rounded),as follows: = MIRR({-30000;11000;11000;11000;11000;11000},0.10,0.10)= 17.48781919% (b)Given a discount rate of 10% and an assumed reinvestment rate of 20%,the estimated MIRR of this project is 22.2% (rounded),as follows: = MIRR({-30000;11000;11000;11000;11000;11000},0.1,0.2)= 22.23274096%