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