Q.NO.8 Investment Analysis: Payback Period, NPV, and Profitability Index for Tiger Corporation’s Project.

Investment Analysis for Tiger Corporation’s Project

Tiger Corporation is considering investing in a project, and we are tasked with calculating the Payback Period, Net Present Value (NPV), and Profitability Index (PI) using a required rate of return of 13%.

Given Data:

• Initial Investment (Year 0): $150,000
• Year 1 Cash Flow: $50,000
• Year 2 Cash Flow: $56,000
• Year 3 Cash Flow: $64,000
• Year 4 Cash Flow: $68,000
• Year 5 Cash Flow: $72,000
• Discount Rate: 13%

1. Payback Period

The Payback Period is the time it takes for the project to recover its initial investment from cumulative cash inflows.

Calculation:

• Initial Investment: $150,000
• Cumulative Cash Flows:
  • Year 1: $50,000
  • Year 2: $50,000 + $56,000 = $106,000
  • Year 3: $106,000 + $64,000 = $170,000 (cumulative cash flow exceeds the initial investment)

By the end of Year 2, the project has recovered $106,000. In Year 3, we need an additional $44,000 ($150,000 – $106,000) to break even.

2. Net Present Value (NPV)

3. Profitability Index (PI)

The Profitability Index (PI) is the ratio of the present value of future cash inflows to the initial investment. The formula for PI is:

Summary of Results:

1. Payback Period: 2.69 years (or 2 years and 8.25 months)
2. Net Present Value (NPV): $63,243.60
3. Profitability Index (PI): 1.43

Conclusion:

• The project has a payback period of approximately 2.69 years, meaning the initial investment is recovered within this time frame.
• The NPV is positive at $63,243.60, indicating that the project is expected to generate value above the cost of capital.
• The PI is 1.43, suggesting that for every $1 invested, the project is expected to return $1.43, making it a profitable investment.

Based on these metrics, the project appears to be financially viable and worth considering.

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