The total investment of $20 million consists of $18 million for new equipment, $4 million for the modification of existing facilities, and $2 million in additional working capital. The companyâ€™s cost of capital is 10 percent. The tenâ€™s year net cash flows in both Exhibits 1 and 2 should be increased by $2 million because the $2 million in additional working capital will be released from the project when it has only 10-year economic life.
a. Determine the discounted payback period at 10 percent cost of capital.
b. Determine both the net present value and the profitability index at 10 percent cost of capital.
c. Confirm that the internal rate of return is 11 percent for cash flows including sales erosion (cash flows in Exhibit 1) and 9 percent for cash flows excluding sales erosion