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Activity 6 - Module 6 - Case Analysis

The investment project analysis indicates a positive Net Present Value (NPV) of ₱111,947, an Internal Rate of Return (IRR) of 10.65%, and a payback period of approximately 2.54 years. These metrics suggest that the project is financially viable and a good investment opportunity. Therefore, it is recommended to proceed with the project based on its favorable financial outlook.

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202 views4 pages

Activity 6 - Module 6 - Case Analysis

The investment project analysis indicates a positive Net Present Value (NPV) of ₱111,947, an Internal Rate of Return (IRR) of 10.65%, and a payback period of approximately 2.54 years. These metrics suggest that the project is financially viable and a good investment opportunity. Therefore, it is recommended to proceed with the project based on its favorable financial outlook.

Uploaded by

shashaamarillo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Bukidnon State University

College of Business

Business Administration Department

Case Analysis:

“Investment Project Analysis for Capital Budgeting and Cost of

Capital”

Submitted to

Mrs. Elizabeth A. Proel

Submitted by

Sharil O. Amarillo

Janelyn M. Butanas

Sherilyn I. Mahayag

April 2025
Given Information

- Initial Investment : ₱5,000,000

- Annual Cash Inflows :

- Year 1: ₱2,000,000

- Year 2: ₱3,000,000

- Year 3: ₱4,000,000

- Annual Operating Costs (30%)

- Year 1: ₱600,000

- Year 2: ₱900,000

- Year 3: ₱1,200,000

- Net Cash Inflows :

- Year 1: ₱2,000,000 - ₱600,000 = ₱1,400,000

- Year 2: ₱3,000,000 - ₱900,000 = ₱2,100,000

- Year 3: ₱4,000,000 - ₱1,200,000 = ₱2,800,000

WACC (Cost of Capital): 10%

Net Present Value (NPV)

NPV = E (CFt / (1 + r)^t ) - Initial Investment

Where:

- CFt = net cash flow at year t

- r = 10%

- Initial Investment = ₱5,000,000

Calculation :

NPV = 1,400,000 / 1.1^1 + 2,100,000 /1.1^2 + 2,800,000 / 1.1^3 –


5,000,000

NPV = 1,400,000 / 1.1 + 2,100,000 / 1.21 + 2,800,000 / 1.331

NPV ≈ 1,272,727 + 1,735,537 + 2,103,683 = 5,111,947


NPV ≈ 5,111,947 – 5,000,000 = ₱111,947

NPV is positive, so the project is viable.

Internal Rate of Return (IRR)

We already know:

NPV = 0 = E (CFt / 1+ IRRt ) 1 + ) – 5,000,000

Using a financial calculator or Excel’s IRR function :

IRR ≈ 10.65%

IRR > 10% → Good investment.

Payback Period

How long to recover ₱5,000,000 from net cash inflows?

- End of Year 1: ₱1,400,000

- End of Year 2: ₱1,400,000 + ₱2,100,000 = ₱3,500,000

- Year 3 needed: ₱5,000,000 - ₱3,500,000 = ₱1,500,000

From Year 3: ₱1,500,000 / ₱2,800,000 ≈ 0.54 year

Payback Period ≈ 2.54 years

Summary of Results

1. NPV : ₱111,947 (Positive, so the project is viable)

2. IRR: 10.65% (>10%, good investment)

3. Payback Period : 2.54 years


Conclusion :

- The project is financially viable.

- NPV, IRR, and Payback Period suggest the company should move
forward with the project.

- The project presents a favorable financial outlook based on its positive


NPV, >10% IRR, and short payback period.

- Given the favorable financial metrics, we recommend pursuing the


project.

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