Essay About Payback Period And Profitability Index

Investment Decisions Case
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Investment Decisions Case
Mini-case: Conch Republic Electronics
a. Payback period of the project
Years
Prototype
Market
Study
Equipments
Variable
Fixed
Total cost
Sales
price
Sales
Volume
Total sales
750,000
200,000
15,000,000
6,020,000
3,000,000
24,970,000
70,000
17,500,000
6,880,000
3,000,000
9,880,000
80,000
20,000,000
8,600,000
3,000,000
11,600,000
100,000
25,000,000
7,310,000
3,000,000
10,310,000
85,000
21,250,000
6,450,000
3,000,000
9,450,000
75,000
18,750,000
66,210,000
102,500,000
Payback Period = Costs of project / Annual Cash Inflows
PP =
It will take 3.23 years to recover its initial costs.
Profitability index is the following
Initial investment is 750,000 + 200,000 + 15,000,000 + 6,020,000 + 3,000,000 = 24,970,000
Estimated life 5 years
Annual cash inflows =
20,500,000
Required rate of return = 12%
PV = $20,500,000 x PV of an annuity of $1 for 5 years and 12% = 3.6048 = $20,500,000 x 3.6048
73,898,400
Profitability index = PV / I = 73,898,400 / 20,500,000 =
This project generates $2.96 for each dollar invested, therefore, it should be accepted.
Notes
Unit Sales
Total Sales
Var. Cost
Cash Flow
70,000
17,500,000
6,020,000
3,500,000
3,500,000
80,000
20,000,000
6,880,000
4,000,000
-500,000
100,000
25,000,000
8,600,000
5,000,000
-1,000,000
85,000
21,250,000
7,310,000
4,250,000
750,000
75,000
18,750,000
6,450,000
3,750,000
500,000
Development = 750,000
Marketing = 200,000
Initial investment = 950,000
Required Return (12%)
Tax 35%
Unit Price
Unit Sales
70,000
80,000
100,000
85,000
75,000
Revenue
17,500,000
20,000,000
25,000,000
21,250,000
18,750,000
Variable Costs
6,020,000
6,880,000
8,600,000
7,310,000
6,450,000
Fixed Costs
3,000,000
3,000,000
3,000,000
3,000,000
3,000,000
Depreciation (MACRS)
15,000,000
2,143,500
3,673,500
2,623,500
1,873,500
1,339,500
6,336,500
6,446,500
10,776,500
9,066,500
7,960,500
Taxes (35%)
2,217,775
2,256,275
3,771,775
3,173,275
2,786,175
Net Income
4,118,725
4,190,225
7,004,725
5,893,225
5,174,325
-950,000
+6,352,000
/10.25
+6,352,000
/105.06
+6,352,000
/1076.89
+6,352,000
/11,038.13
+6,352,000
/113,140.82
NPV =
-950,000
+603,802.28
+60,460.69
+5898.47
+575.46
+56.14
NPV =
-950,000
+670,793.04
NPV =
-279,206.96
NPV =
3. IRR =
NPV = 0 = – 950,000 + 6,352,000 / (1 + R)
950,000 = 6,352,000 / (1 + R)
1 + R = 6,352,000 / 950,000