Final answer:
The Net Present Value (NPV) of the project is $23,396.51. The Internal Rate of Return (IRR) is approximately 20.04%. The Profitability Index (PI) is 508,896.51. Based on these calculations, the company should accept the project.
Step-by-step explanation:
To calculate the Net Present Value (NPV), we need to discount the cash flows from each year to present value using the required 12% return rate. The formula for calculating the present value of cash flows is PV = CF / (1 + r)^t, where CF is the cash flow, r is the discount rate, and t is the year. Applying this formula to the cash flows given, we get:
Year 0: PV = -342,500 / (1 + 0.12)^0 = -342,500
Year 1: PV = 152,500 / (1 + 0.12)^1 = 136,160.71
Year 2: PV = 152,500 / (1 + 0.12)^2 = 121,445.83
Year 3: PV = 152,500 / (1 + 0.12)^3 = 108,289.97
To calculate the NPV, we sum up the present values of the cash flows:
NPV = -342,500 + 136,160.71 + 121,445.83 + 108,289.97 = 23,396.51
The Internal Rate of Return (IRR) is the discount rate that makes the NPV equal to zero. In this case, the IRR is approximately 20.04%.
The Profitability Index (PI) is calculated by dividing the present value of cash inflows by the present value of cash outflows. Since there's no cash outflow in this project, the PI is equal to the present value of cash inflows, which is 508,896.51.
Based on these calculations, the company should accept the project because the NPV is positive, the IRR is greater than the required return rate, and the PI is greater than 1.