Question

the benefit-cost ratio for a project with an initial outlay of $9000 and net cash flows...

the benefit-cost ratio for a project with an initial outlay of $9000 and net cash flows of %5000 p.a. for the next three years and a required rate of return of %10 p.a. is:

A. $3434.

B. 0.3815

C. 1.21

D.1.3815

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Homework Answers

Answer #1

Initial Outlay= $9000

Net Cash Flows= $5000 p.a.

Interest rate per period/ Discounting rate= 10%

Present Value of Cash Inflows= CF1/ (1+r) + CF2/ (1+r)2 +.....CFn/ (1+r)n

Since the cash flows are same throughout, this can be solved using the formula for PV of ordinary annuity:

  

PV= 5000*{[1- (1/(1.1)3]/0.1}= 12434

Or it can be calculated as present value of individual cash flows:

1 2 3
       4,545        4,132        3,757      12,434

Benefit/Cost ratio= PV of Cash Inflows/ Initial Outlay

=12434/9000 = 1.3815

Answer: D

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