Question

Question 4 (Total marks =15)

You are evaluating an investment project, Project XX, with the
following cash flows:

Period Cash Flow

0 -$200,000

1 $65,000

2 $65,000

3 $65,000

4 $65,000

5 -$65,000

Calculate the following:

(a). Payback period ( 2 marks)

(b). Calculate the discounted cash flows for each year, assuming a
10% discount rate.

(c) Discounted payback period, assuming a 10% cost of capital.

(d) .Net present value, assuming a 10% cost of capital.

(e). Profitability index, assuming a 10% cost of capital.

(f). Modified internal rate of return, assuming reinvestment at 10%.

Answer #1

1. Payback Period = Total Investment = 200,000 + 65,000 = 265,000

Cash Flow during the life of the project = 260,000

So the firm will not be able to recover the money during the life of the asset

2. Discounted cash flows are

Year | Cash Flows | PVF | PVCI | Cummulative cash Flow |

0 | -200000 | 1 | -200000 | -200000 |

1 | 65000 | 0.9091 | 59090.91 | -140909 |

2 | 65000 | 0.8264 | 53719.01 | -87190.1 |

3 | 65000 | 0.7513 | 48835.46 | -38354.6 |

4 | 65000 | 0.6830 | 44395.87 | 6041.254 |

5 | -65000 | 0.6209 | -40359.9 | -34318.6 |

3. Discounted pay back period

Present Value of Cash Outflows = 200,000 + 40360 = 240,360

Present Value of Cash Iflows = 206041

SO Discounted payaback period can be determined as it extends beyond the life of the project

4. NPv = Sum tota of all cash flows i.e total of 4th column in the above table = -34,318.60

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