Question

36. Setesh of Kanaan's new pyramid project has expected cash inflows, starting with year 1, of $2,000, $4,000, $4,800 and finally in year four, $8,300. The profitability index is 1.53 and the discount rate is 11.4 percent. What is the initial cost of the project?

35. What is the net present value of a project that has an initial cost of $68,000 and produces cash inflows of $20,000 a year for 10 years if the discount rate is 14.6 percent?

Answer 1

Answer to Question 36:

Cash Inflows:
Year 1 = $2,000
Year 2 = $4,000
Year 3 = $4,800
Year 4 = $8,300

Discount Rate = 11.4%

Present Value of Cash Inflows = $2,000/1.114 + $4,000/1.114^2 + $4,800/1.114^3 + $8,300/1.114^4
Present Value of Cash Inflows = $13,879.96

Profitability Index = Present Value of Cash Inflows / Initial Investment
1.53 = $13,879.96 / Initial Investment
Initial Investment = $9,072

So, initial cost of the project is $9,072

Answer to Question 37:

Initial Cost = $68,000
Annual Cash Inflows = $20,000
Life of Project = 10 years
Discount Rate = 14.6%

Net Present Value = -$68,000 + $20,000 * PVA of $1 (14.6%, 10)
Net Present Value = -$68,000 + $20,000 * (1 - (1/1.146)^10) / 0.146
Net Present Value = $33,924.76