Case02 Piedmont
1. How will discount rates of 8, 10, 12, 14, and 16 percent affect the project’s feasibility?
Figures 6 – 10 provide suggested answers for this question. The answers for this question assume a useful life of 5 years. Using a discount rate of 8 percent, the net present value of all benefits is $1,732,836.16; the net present value of all costs is $1,640,384.79; the overall net present value is $92,451.36, and the project breaks even in approximately 3.84 years.
Using a 10 percent discount rate, the net present value of all benefits is $1,645,201.46; the net present value of all costs is $1,576,173.19; the overall net present value is $69,028.27, and the project breaks even in approximately 4.04 years.
Using a 12 percent discount rate, the net present value of all benefits is $1,564,472.87; the overall net present value of all costs is $1,517,021.83; the overall net present value is
$47,451.04, and the project breaks even in approximately 4.279 years.
Using a 14 percent discount rate, the net present value of all benefits is $1,489,957.14; the net present value of all costs is $1,462,422.75; the overall net present value is $27,534.39, and the project breaks even in approximately 4.54 years.
Using a discount rate of 16 percent, the net present value of all benefits is $1,421,043.45; the net present value of all costs is $1,411,928.38, and the overall net present value is
$9,115.06. At a discount rate of 16 percent, the project breaks even in 4.83 years.
1. Reset the discount rate to 14 percent. Prepare a breakeven chart that compares the net present value of all benefits to the net present value of all costs.
Figure 11 provides a suggested answer. The solution is also provided in the solution file’s ISQ2 BEP Chart worksheet.
2. If management stipulates that the internal rate of return must be equal to or greater than the discount rate, is this project still justifiable?
Using the results shown in Figure 10 as a guide, it appears that the internal rate of
Figures 6 – 10 provide suggested answers for this question. The answers for this question assume a useful life of 5 years. Using a discount rate of 8 percent, the net present value of all benefits is $1,732,836.16; the net present value of all costs is $1,640,384.79; the overall net present value is $92,451.36, and the project breaks even in approximately 3.84 years.
Using a 10 percent discount rate, the net present value of all benefits is $1,645,201.46; the net present value of all costs is $1,576,173.19; the overall net present value is $69,028.27, and the project breaks even in approximately 4.04 years.
Using a 12 percent discount rate, the net present value of all benefits is $1,564,472.87; the overall net present value of all costs is $1,517,021.83; the overall net present value is
$47,451.04, and the project breaks even in approximately 4.279 years.
Using a 14 percent discount rate, the net present value of all benefits is $1,489,957.14; the net present value of all costs is $1,462,422.75; the overall net present value is $27,534.39, and the project breaks even in approximately 4.54 years.
Using a discount rate of 16 percent, the net present value of all benefits is $1,421,043.45; the net present value of all costs is $1,411,928.38, and the overall net present value is
$9,115.06. At a discount rate of 16 percent, the project breaks even in 4.83 years.
1. Reset the discount rate to 14 percent. Prepare a breakeven chart that compares the net present value of all benefits to the net present value of all costs.
Figure 11 provides a suggested answer. The solution is also provided in the solution file’s ISQ2 BEP Chart worksheet.
2. If management stipulates that the internal rate of return must be equal to or greater than the discount rate, is this project still justifiable?
Using the results shown in Figure 10 as a guide, it appears that the internal rate of