Question 4 (6 marks)

Use the following information for questions 1-6:

Pioneer Limited is planning on investing in a new project. This will involve the purchase of
some new machinery costing $160 million that will be fully depreciated over 6 years. Pioneer
Limited expects to receive incremental free cash flows of $30 million at the end of each year
for 6 years.
1. Calculate net present value for this project at weighted average cost of capital (WACC) of
3% per annum.
30
= 160 + 3% (1 (1 + 3%)6 ) = $2.52
30 30 30 30 30 30
= 160 + + + + + +
(1 + 3%)1 (1 + 3%)2 (1 + 3%)3 (1 + 3%)4 (1 + 3%)5 (1 + 3%)6
= $2.52
> 0
2. Without calculations, IRR for this project is which one of the following:
a. Equal to 3% > > 0
b. Greater than 3%
= = 0
c. Less than 3%
< < 0
d. None of the above

3. Calculate modified internal rate of return for this project .

= 30 + 30(1 + 3%) + 30(1 + 3%)2 + 30(1 + 3%)3 + 30(1 + 3%)4 + 30(1 + 3%)5 = 194.05
0 = 160
1 1
194.05 6
= ( ) 1 = ( ) 1 = 3.27%
0 160
> 0 > >
4. Calculate profitability index for this project.
+ 0 1.52 + 160
= = = 1.016
0 160
> 0 > 1

5. Calculate payback period for this project.

160
= 30 = 5.33
0 1 2 3 4 5 6
FCF -160 30 30 30 30 30 30
CFCF -160 -130 -100 -70 -40 -10 20
10
= 5 + = 5.33
30

6. Calculate discounted payback period for this project.

0 1 2 3 4 5 6
FCF -160.00 30.00 30.00 30.00 30.00 30.00 30.00
DFCF 160 30 30 30 30 30 30
(1 + 3%)0 (1 + 3%)1 (1 + 3%)2 (1 + 3%)3 (1 + 3%)4 (1 + 3%)5 (1 + 3%)6
-160.00 29.13 28.28 27.45 26.65 25.88 25.12
CDFCF -160.00 -130.87 -102.60 -75.14 -48.49 -22.61 2.52
22.61
= 5 + 25.12 = 5.90 > 0 >

7
Question 4 (6 marks)
Use the following information for questions 1-6:
Pioneer Limited is planning on investing in a new project. This will involve the purchase of
some new machinery costing $160 million that will be fully depreciated over 6 years. Pioneer
Limited expects to receive incremental free cash flows of $30 million at the end of each year
for 6 years.
1. Calculate net present value for this project at weighted average cost of capital (WACC) of
4% per annum.
30
= 160 + 4% (1 (1 + 4%)6 ) = $2.74
30 30 30 30 30 30
= 160 + 1
+ 2
+ 3
+ 4
+ 5
+ = $2.74
(1 + 4%) (1 + 4%) (1 + 4%) (1 + 4%) (1 + 4%) (1 + 4%)6
< 0

2. Without calculations, IRR for this project is which one of the following:
a. Equal to 4% > > 0
b. Greater than 4% = = 0
c. Less than 4% < < 0
d. None of the above

3. Calculate modified internal rate of return for this project .

= 30 + 30(1 + 4%) + 30(1 + 4%)2 + 30(1 + 4%)3 + 30(1 + 4%)4 + 30(1 + 4%)5 = 198.99
0 = 160
1 1
198.99 6
= ( ) 1 = ( ) 1 = 3.70%
0 160
< 0 < <

4. Calculate profitability index for this project.

+ 0 2.74 + 160
= = = 0.983
0 160
< 0 < 1
5. Calculate payback period for this project.
160
= 30 = 5.33
0 1 2 3 4 5 6
FCF -160 30 30 30 30 30 30
CFCF -160 -130 -100 -70 -40 -10 20
10
= 5 + = 5.33
30

6. Calculate discounted payback period for this project.

0 1 2 3 4 5 6
FCF -160.00 30.00 30.00 30.00 30.00 30.00 30.00
DFCF 160 30 30 30 30 30 30
(1 + 4%)0 (1 + 4%)1 (1 + 4%)2 (1 + 4%)3 (1 + 4%)4 (1 + 4%)5 (1 + 4%)6
-160.00 28.85 27.74 26.67 25.64 24.66 23.71
CDFCF -160.00 -131.15 -103.42 -76.75 -51.10 -26.45 -2.74
!
< 0 !

7
Question 4 (6 marks)
Use the following information for questions 1-6:
Pioneer Limited is planning on investing in a new project. This will involve the purchase of
some new machinery costing $160 million that will be fully depreciated over 6 years. Pioneer
Limited expects to receive incremental free cash flows of $30 million at the end of each year
for 6 years.
1. Calculate net present value for this project at weighted average cost of capital (WACC) of
3% per annum.
30
= 160 + 3% (1 (1 + 3%)6 ) = $2.52
30 30 30 30 30 30
= 160 + 1
+ 2
+ 3
+ 4
+ 5
+ = $2.52
(1 + 3%) (1 + 3%) (1 + 3%) (1 + 3%) (1 + 3%) (1 + 3%)6
> 0
2. Calculate net present value for this project at weighted average cost of capital (WACC) of
4% per annum.
30
= 160 + 4% (1 (1 + 4%)6 ) = $2.74
30 30 30 30 30 30
= 160 + + + + + + = $2.74
(1 + 4%)1 (1 + 4%)2 (1 + 4%)3 (1 + 4%)4 (1 + 4%)5 (1 + 4%)6
< 0
3. Without calculations, IRR for this project is which one of the following:
a. 2.47% > > 0
b. 3.47% = = 0
c. 4.47% < < 0
d. 5.47%
4. Draw the relationship between NPV, IRR and cost of capital.

NPV > 0
IRR > WACC

NPV < 0
NPV = 0 IRR < WACC
IRR = WACC

5. Calculate modified internal rate of return for this project at weighted average cost of capital
(WACC) of 3% per annum.
= 30 + 30(1 + 3%) + 30(1 + 3%)2 + 30(1 + 3%)3 + 30(1 + 3%)4 + 30(1 + 3%)5 = 194.05
0 = 160
1 1
194.05 6
= ( ) 1 = ( 160 ) 1 = 3.27%
0
> 0 > >
6. Calculate modified internal rate of return for this project at weighted average cost of capital
(WACC) of 4% per annum.
= 30 + 30(1 + 4%) + 30(1 + 4%)2 + 30(1 + 4%)3 + 30(1 + 4%)4 + 30(1 + 4%)5 = 198.99
0 = 160
1 1
198.99 6
= ( ) 1 = ( 160 ) 1 = 3.70%
0
< 0 < <

7
Question 4 (6 marks)
Use the following information for questions 1-6:
Pioneer Limited is planning on investing in a new project. This will involve the purchase of
some new machinery costing $160 million that will be fully depreciated over 6 years. Pioneer
Limited expects to receive incremental free cash flows of $30 million at the end of each year
for 6 years.
1. Calculate net present value for this project at weighted average cost of capital (WACC) of
3.473% per annum.
30
= 160 + 3.473% (1 (1 + 3.473%)6 ) = $0
30 30 30 30 30 30
= 160 + + + + + + = $0
(1 + 3.473%)1 (1 + 3.473%)2 (1 + 3.473%)3 (1 + 3.473%)4 (1 + 3.473%)5 (1 + 3.473%)6
= 0
2. Without calculations, IRR for this project is which one of the following:
a. 2.473% > > 0
b. 3.473% = = 0
c. 4.473% < < 0
d. 5.473%
3. Calculate modified internal rate of return for this project .
= 30 + 30(1 + 3.473%) + 30(1 + 3.473%)2 + 30(1 + 3.473%)3 + 30(1 + 3.473%)4
+ 30(1 + 3.473%)5 = 196.37
0 = 160
1

= ( ) 1
0
1
196.37 6
= ( ) 1 = 3.473%
160
= 0 = =
4. Calculate profitability index for this project.

+ 0 0 + 160
= = =1
0 160
= 0 = 1
5. Calculate payback period for this project.
160
= 30 = 5.33
0 1 2 3 4 5 6
FCF -160 30 30 30 30 30 30
CFCF -160 -130 -100 -70 -40 -10 20
10
= 5 + = 5.33
30
6. Calculate discounted payback period for this project.
0 1 2 3 4 5 6
FCF -160.00 30.00 30.00 30.00 30.00 30.00 30.00
DFCF 160 30 30 30 30 30 30
(1 + 3.473%)0 (1 + 3.473%)1 (1 + 3.473%)2 (1 + 3.473%)3 (1 + 3.473%)4 (1 + 3.473%)5 (1 + 3.473%)6
-160.00 28.99 28.02 27.08 26.17 25.29 24.44
CDFCF -160.00 -131.01 -102.99 -75.91 -49.74 -24.44 0.00
24.44
= 5 + = 6
24.44
= 0 > =

7
Question 4 (6 marks)
Use the following information for questions 1-6:
Alpha Limited is planning on investing in a new project. This will involve the purchase of some
new machinery costing $200 million that will be fully depreciated over 6 years. The salvage
value is $10 million at the end of year 6. Alpha Limited expects to receive cash flows of $40
million at the end of year 1 and $50 million at the end of each of the following five years. Alpha
Limited expects to receive net income of $12 million at the end of year 1 and $16 million at
the end of each of the following five years.
1. Calculate net present value for this project at weighted average cost of capital (WACC) of
11% per annum and 12% per annum.
40 50
@11% = 200 + + (1 (1 + 11%)5 ) (1 + 11%)1 = $2.52
(1 + 11%) 11%
40 50
@12% = 200 + + (1 (1 + 12%)5 ) (1 + 12%)1 = $3.36
(1 + 12%) 12%

2. Without calculations, IRR for this project is which one of the following:
a. 9.42% > > 0
b. 10.42% = = 0
c. 11.42% < < 0
d. 12.42%

3. Draw the relationship between NPV, IRR and cost of capital. State the relationships on the
graph.

NPV > 0
IRR > WACC

NPV = 0 NPV < 0

IRR = WACC IRR < WACC

4. Calculate profitability index for this project at WACC of 11%.

+ 0 2.52 + 200
= = = 1.013
0 200
5. Calculate MIRR for this project at WACC of 11%.
50
= ((1 + 11%)5 1) + 40(1 + 11%)5 = 378.79
11%
0 = 200
1 1
378.79 6
= ( ) 1 = ( ) 1 = 11.23%
0 200
6. Calculate the accounting rate of return for this project.

=
( + )/2
(12 + 16 + 16 + 16 + 16 + 16)/6
= = 14.6%
(200 + 10)/2

7
Question 4 (6 marks)
Use the following information for questions 1-6:
Omega Limited is planning on investing in a new project. This will involve the purchase of
some new machinery costing $300 million that will be fully depreciated over 6 years. The
salvage value is zero at the end of year 6. Omega Limited expects to receive cash flows of $50
million at the end of year 1, $60 million at the end of year 2 and $70 million at the end of each
of the following four years. Omega Limited expects to receive net income of $8 million at the
end of year 1, $12 million at the end of year 2 and $16 million at the end of each of the following
four years.
1. Draw a timeline for this project showing all cash flows.
( )
0 1 2 3 4 5 6
$-300 $50 $60 $70 $70 $70 $70

2. Calculate the net present value (NPV) for this project at cost of capital 7% per annum.
50 60 70
@7% = 300 + + 2
+ (1 (1 + 7%)4 ) (1 + 7%)2
(1 + 7%) (1 + 7%) 7%
@7% = $6.232

> 0

3. Without calculations, the internal rate of return for this project is

a. Equal to 7% > > 0
b. Greater than 7% = = 0
c. Less than 7% < < 0
d. None of the above

4. Calculate profitability index for this project at WACC of 7%.

+ 0 6.232 + 300
= = = 1.021
0 300

5. Calculate the payback period (PBP) for this project.

Year 0 1 2 3 4 5 6
CF (MMAUD) -300.00 50.00 60.00 70.00 70.00 70.00 70.00
CCF (MMAUD) -300.00 -250.00 -190.00 -120.00 -50.00 20.00 90.00
50
= 4 + = 4.714
70

6. Calculate the accounting rate of return (ARR) for this project.

=
( + )/2

(8 + 12 + 16 + 16 + 16 + 16)/6 9.5
= = = 9.33%
(300 + 0)/2 50