Question

2. Consider an existing project with an annual cash generation of $8000 expected to last 15 years. If an additional single investment of $10,000 is made, the cash flow will be accelerated to $12,000 per year but would last only 10 years, since no new cash was generated.

a) Generate a cash flow table for this project

b) Analyse the profitability of this accelerated project using discounted cash flow rate of return.

(No discount rate was given)

Answer 1

Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
Cashflow	0	8000	8000	8000	8000	8000	8000	8000	8000	8000	8000	8000	8000	8000	8000	8000
NPVA	$19,894.82
Year	0	1	2	3	4	5	6	7	8	9	10
Cashflow	-10000	12000	12000	12000	12000	12000	12000	12000	12000	12000	12000
NPVB	$19,842.22

Cash flow table is given above, while looking into it we can say that both project at 10% wacc will be alomost equal. If the WACC is more than 10% then one should select exisitng project and if the WACC is less than 10% then accelerated project will be a better option.