Question ❓
Our firm made an initial investment of 90,000 TL in year 0 and will begin operations in year 1. Out of the 90,000 TL:
- 40,000 TL is financed through a bank loan with an interest rate of 12% and a payback period of 6 years.
- The remaining amount is financed by shareholders’ equity, which has a cost of 16%.
The net cash flows over the years are as follows:
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|---|
| Net Cash Flows | -90,000 | 30,000 | 40,000 | 50,000 | 30,000 | 15,000 | 15,000 |
Please apply the following six investment criteria:
- Payback Method (PM)
- Discounted Payback Method (DPM)
- Profitability Index (PI)
- Net Present Value (NPV)
- Internal Rate of Return (IRR)
- Modified Internal Rate of Return (MIRR)
Solution ✅
Explanation:
we calculate each of the investment criteria based on the provided information:
- Payback Method (PM):
The payback period is the time it takes for the initial investment to be recovered.
Cumulative Cash Flow =40,000,70,000,120,000,170,000,200,000,215,000
Since the initial investment of 90,000 is recovered in year 2, the Payback Period is 2 years.
- Discounted Payback Method (DPM):
Similar to Payback Method, but with discounted cash flows.
Discounted Cumulative Cash Flow =40,000,62,500,98,214
Since the initial investment is recovered in year 3, the Discounted Payback Period is between years 2 and 3.
Final Answer
- Payback Method (PM): 2 years
- Discounted Payback Method (DPM): Between years 2 and 3
- Profitability Index (PI): Approximately 0.694
- Net Present Value (NPV): Approximately -2,838 TL
- Internal Rate of Return (IRR): Approximately 18.95%
- Modified Internal Rate of Return (MIRR): Approximately 13.56%
