Question

Please make sure that you show all your work when solving the problems. Feel free to make any assumptions whenever you feel necessary. Just make sure that you clearly state your assumptions.

Should you accept a project that costs $125,000 initially, and provides cash flows of $45,000, $60,000 and $75,000 for the following three years, given that the project has the same risk as another project that requires an initial investment of $50,000 and requires an annual cash flow of $9,000 forever to financially break-even?

Answer 1

Same risk project will help to determine the rate of return applicable
Initial outlay	50000
Inflow forever	9000
Rate of return=	9000/50000
Rate of return=	18.000%

		18.00%
Year	Cash Flow	PV factor = 1/ (1+r)^t	PV
0	(125,000)	1.000	(125,000.00)
1	45,000	0.847	38,135.59
2	60,000	0.718	43,091.07
3	75,000	0.609	45,647.32
		NPV	1,873.97
Since NPV is positive, the project should be accepted