Polycorp is considering an investment in new plant of 3

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Reference no: EM13381524

Polycorp is considering an investment in new plant of $3 million. The project will be financed with a loan of $2,000,000 which will be repaid over the next five years in equal annual end of year instalments at a rate if 9 percent pa. Assume straight-line depreciation over a five-year life, and no taxes. The projects cash flows before loan repayments and interest are shown in the table below. Cost of capital is 15.5% pa (the required rate of return on the project). A salvage value of $200,000 is expected at the end of year five and this salvage value is already included in the year five cash flows in the table below. Ignore taxes and inflation.

Year	Year One	Year Two	Year Three	Year Four	Year Five
Cash Inflow	900,000	950,000	850,000	950,000	950,000

You are required to calculate:

(1) The annual loan repayment

(2) NPV of the project

(3) the IRR of the project

(4) the annual equivalent for the project(AE or EAV)

(5) the payback in years (to one decimal place)

(6) the accounting rate of return (gross)

(7) PI (present value index or profitability index)

(8) Is the project acceptable? Why or why not (provide a full explanation)?

Reference no: EM13381524

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