Question

Q1/A project has an initial cost of $99,865, and promises to pay a fixed cash flow per year for 3 years. It has been determined that using a discount rate of 12.1 percent, its net present value is $100,196. What must be the expected annual cash flow?

Q2/The Xdiagnose Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash inflow of $135,682 for the firm during the first year, and the cash flows are projected to grow at a rate of 3.9 percent per year forever. The project requires an initial investment of $1.6 million. If Xdiagnose requires a 10.1 percent return on such undertakings, what is the NPV of the project?

Q3/A project has the following cash flows for years 0 through 3, respectively: -14,881, 5,535, 5,354, 17,161. What is the payback period?

Answer 1

1)

NPV = PV of cash Inflows - PV of Cash Outflows

Let " X" be the annual cash Flow

Given NPV = 100,196

2.3977X - 99865 = 100196

2.3977X = 100196 + 99865

= 200061

X = 200061 /2.3977

= 83438.71

Q2)

NPV = PV of Cash Inflows - PV of Cash Outflows

PV of Cash Inflows = CF1 / ( Ke -g)

= $ 135,682 / ( 10.1% - 3.9%)

= 135682 / 6.2%

= 2188419

NPV = PV of Cash Inflows - PV of Cash Outflows

= 2188419 - 1600000

= 588419

Q3)

Payback period = Period in which initial investment is recoevered.

Payback period =Year in which least +ve Closing bal + [ closing bal at that year / Amount recovered in next year ]

= 2 + [ 3992 / 17161 ]

= 2+ 0.23

= 2.23 Years