###Question 10###

VWX Ltd. is planning to diversify its product line with an initial investment of $600,000. The following are the projected net cash flows over six years:

Projected Net Cash Flows (in thousands of dollars)

Year 1: $100$

Year 2: $120$

Year 3: $150$

Year 4: $170$

Year 5: $190$

Year 6: $210$

Requirements:

1. Calculate the Net Present Value (NPV) of the investment using a discount rate of $9%$.
2. Determine the Internal Rate of Return (IRR) for the investment.
3. Compute the Discounted Payback Period for the investment.
4. Assess the profitability index (PI) for the investment.
5. Recommend whether VWX Ltd. should pursue the diversification based on your analysis.

Q1

A company is considering an investment in a new project that will require an initial outlay of $500,000. The project is expected to generate annual cash flows of $120,000 for the next 6 years. The company’s cost of capital is 10%. The present value factors for 6 years are given below:

Discount Rate	Cumulative Factors
10%	4.355
11%	4.231
12%	4.111
13%	3.998
14%	3.890

Requirements:

1. Calculate the Net Present Value (NPV) of the project.
2. Determine the internal rate of return (IRR) of the project.
3. Should the company undertake the project based on NPV?
4. What is the payback period for the project?
5. Explain the significance of IRR in this context.