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NPV, IRR, and Profitability Index

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In order to expand its business, Auto Parts Distributing, Inc., is considering the purchase of four pickup trucks at a total cost of $180,000. The company expects to keep these trucks for four years, then sell them. The company expects these trucks to generate a after tax net cash flow of $95,000 in year 1, $90,000 in year 2, $85,000 in year 3, $80,000 in year 4, and to sell after four years for a total price of $30,000 non-taxable. The companys marginal tax rate is 35% and its cost of capital is 12%.

Calculate:

a. After tax cash flow for each year 1 thru 4 (ignore depreciation)
b. Payback period
c. Profitability Index
d. Net Present Value
e. Internal Rate of Return.

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Solution Summary

The solution computes after tax cash flow for each year 1 thru 4 (ignore depreciation); Profitability Index; Net Present Value; Payback period; Internal Rate of Return.

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Please view attachment for question.

a. Calculate the NPV, IRR, Profitability Index, and MIRR for this project with a cost of capital of 12%.

(see attached)

b.For a single conventional project, the NPV and IRR will agree on whether to invest or to not invest. However, in the case of two mutually exclusive projects, the two criteria will sometimes disagree.Explain the two primary factors that cause NPV and IRR to conflict when evaluating mutually exclusive projects.

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