Question

Exercise 13-12 Uncertain Cash Flows [LO13-4]

The Cambro Foundation, a nonprofit organization, is planning to invest $156,420 in a project that will last for three years. The project will produce net cash inflows as follows:

Year 1	$	60,000
Year 2	$	70,000
Year 3		?

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.

Required:

Assuming that the project will yield exactly a 9% rate of return, what is the expected net cash inflow for Year 3?

Answer 1

Year	Cash flow	Discount Factor @9%	Discounted Cashflow
1	60000	0.917	55020
2	50000	0.841	42050
3	?	0.772	?
Total	?		156420

From the table, The Discounted cashflow for the Third year will be 156,420 - 55,020 - 42,050 = 59350.

Note : The Cashflow discounted at 9% will be equal to the initial invested amount as yield is given as 9%.

Now, the discount factor is given for 3rd year at 9% = 0.772

Thus, Cashflow = Discounted Cashflow / Discount Factor = 59350/0.772 = 76,878.24

The table will be

Year	Cash flow	Discount Factor @9%	Discounted Cashflow
1	60000	0.917	55020
2	50000	0.841	42050
3	76878.24	0.772	59350
Total	186878.2		156420