Based On The Information Provided Below, Compute The Net Pre

Based On The Information Provided Below Compute The Net Present Value

Based on the information provided below, compute the Net Present Value (NPV) and Internal Rate of Return (IRR) of the project (CO 3). A Net Present Value Template is attached. (Hint: Don't forget to update the discount rate to the amount required for this project and add your cash flow numbers.) Royal Dutch Shipping is planning on investing $1,600,000 to buy a freighter. Prepare a net present value and internal rate of return analysis based on the assumption that the freighter will be sold (salvaged) for 10% of its cost at the end of year 5. Assume a 10% cost of capital. Annual operating cash flows for the project are: Year 1: $380,000; Year 2: $390,000; Year 3: $400,000; Year 4: $410,000; Year 5: $420,000. Prepare a loan amortization schedule based on monthly payments for the $1,600,000 if Royal Dutch Shipping can pay 10% down on a loan for $1,600,000 and can get a loan for 6% interest for 10 years (do not include this in your Net Present Value computations). This is a separate issue. (CO 3).

Paper For Above instruction

The objective of this paper is to estimate the Net Present Value (NPV) and Internal Rate of Return (IRR) for Royal Dutch Shipping's proposed investment in a new freighter. The investment project involves an initial outlay of $1,600,000, with expected annual operating cash flows over five years, concluding with the sale of the freighter at a salvage value. Additionally, the paper discusses the preparation of a loan amortization schedule for financing the purchase, although this is a separate financial consideration that does not affect the NPV or IRR calculations directly.

The analysis starts with the calculation of the NPV, which assesses the present value of future cash inflows and outflows discounted at the company's required rate of 10%. This discount rate is essential to account for the time value of money and the project's risk profile. The cash flows include the annual operating cash flows, and the sale of the freighter at the end of year 5, which is valued at 10% of the initial investment, i.e., $160,000.

To compute the NPV, the individual discounted cash flows for each year are calculated using the formula:

NPV = ∑ (Cash flow in year t / (1 + r)^t) - Initial investment

where r represents the discount rate of 10%. The cash flows include annual operating cash flows and the terminal salvage value in Year 5. The salvage value adds to the cash inflow in Year 5, leading to a substantial increase in the project's net worth at the end of the period.

The IRR is the discount rate at which the NPV equals zero. It represents the project's internal rate of return, giving an indication of profitability. By setting the NPV equation to zero and iterating for the discount rate, the IRR provides a benchmark against the company's required rate of 10%. If IRR exceeds the required rate, the project is considered feasible.

The calculation of both metrics involves precise cash flow estimations, discounted appropriately. After computing these values, the decision to proceed can be based on whether the NPV is positive and the IRR exceeds the hurdle rate of 10%.

The loan amortization schedule, prepared separately, involves calculating monthly payments on a $1,600,000 loan with a 6% interest rate over 10 years, with a 10% down payment. This calculation helps determine the monthly repayment obligation, which is relevant for assessing the project's financing costs but does not impact the direct valuation metrics.

Overall, the financial analysis provides a comprehensive view of the project's viability, aiding Royal Dutch Shipping in making an informed investment decision.

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