Question

The Cambro Foundation, a nonprofit organization, is planning to invest $159,040 in a project that will last for three years. The project will produce net cash inflows as follows:

Year 1	$	50,000
Year 2	$	66,000
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 7% rate of return, what is the expected net cash inflow for Year 3?

Answer 1

Since the project will yield exactly a 7% return, it means that the present value of cash inflows is equal to the initial investment. So,

Initial investment = Present value of cash inflows at 7%.

We will use the present value of $1 table to find the present value of cash inflows. So, the equation is:

$159040 = $50000 * PVIF(7%,1 year) + $66000 * PVIF(7%. 2 Years) + Year 3 cash flow * PVIF (7%, Year 3)

Where PVIF(7%, Years) is the present value of $1 at 7% for various years. From the tables, we will put the values in the above equation, as per below:

$159040 = ($50000 * 0.935) + ($66000 * 0.873) + (Year 3 cash flow * 0.816)

$159040 = $46750 + $57618 + Year 3 cash flow * 0.816

$159040 - $46750 - $57618 = Year 3 cash flow * 0.816

$54672 = Year 3 cash flow * 0.816

Year 3 cash flow = $54672 / 0.816

Year 3 cash flow = $67000

So, expected net cash inflow for year 3 is $67000.