Question

Consider an investment project where the cash flow pattern repeats itself every five years forever. Use the capitalized equivalent method to compute the present worth of this project with an interest rate of 13.9%. The cash flow for the five years is given below: ($)

86

86

71

71

29

Answer 1

Solution:

Present value of cash flow= 86 ( PVF @13.9%, year 1) +86 ( PVF @13.9%, year 2 ) + 71 ( [email protected]%, year 3) + 71( PVF @13.9%,year 4) + 29( [email protected]%,year 5)

Present value of cash flows = 86*0.877963 + 86*0.770819 + 71*0.676751 + 71*0.594162 + 29*0.521653

Present value of cash flows = $247.1580

PV = $247.1580

FV = 0

Nper =5 years

Rate = 13.9%

Use Excel function ,

PMT ( Rate, nper, PV, FV)

PMT ( 13.9%, 5, -247.1580,0)

PMT = $71.82

Cash flows continue till perpetuity

Present worth = $71.82/0.139= $516.69