Act500 Module 12: Critical Thinking Assignment

Paderborn Industries is considering two investment projects. The estimated cash flow in SARs for each project is as follows:YearPlant Expansion (8,000,000)Retail Store Expansion (8,000,000)The company has decided that the appropriate discount rate is: 10%2. Calculate the Net Present Value (NPV) for each project3. Calculate the Present Value Index (PI) for each project (round to 3 decimal places)4. Calculate the Internal Rate of Return (IRR) for each project (Round to 2 decimal places)5. Advise management on which, if either, project to pursue and whyCash Pay BackYear 4 proportionPayback period plant expansion = 3.81 yearsPayback period retail store = 3.109 yearsDiscountDiscounted CFInflowsYear 0Year 1Year 2Year 3Net Present ValueYear 4Year 5Plant ExpansionRetail StoreInitial investmentProfitability Index PI for retail store is greater than 1, it generates value and Paderborn Industries may want to proceed with the project.IRRThe management should pursue retail store expansion because it has a shorter cash payback period, has a positive profitability index, a positive NPV and a higher IRR than plant expansionCash flow Plant ExpansionCumulative Net Cash flow Plant ExpansionCash flow Plant Retail StoreCumulative Net Cash flow Retail StoreOutflowsProfitability Index= present value of future cash flows divided by initial investmentPresent value of future cash flows PI for plant expansion is