Question

You are analysing a capital investment project. You forecast the following cash-flows:

year	0	1	2	3	4	5
cash flow		+10	+20	-5	-10	0

What is the maximum investment you are willing to make into this project today if your required return is 15% per year (e.g. cost of capital)

(Show positive number as an answer. Please round your answer to the nearest full number. For example if your answer for investment is 21.26, show 21 as an answer, for 21.51 the answer should be 22)

Answer 1

Given the cash flows, the Maximum investment that can be made into a project today is the one which is equal to the present value of all cash flows together or, where the Net Present Value of the project is equal to 0.

i.e.,

where, C0 = Initial investment

CF= cash flows

n = Time period

It can be computed as follows:

We would first compute the present value of all cash flows at 15% rate.

Year	Cash flows	Present Value Factor@15%	Present Value
1	10	0.870	8.7
2	20	0.756	15.12
3	(5)	0.658	(3.29)
4	(10)	0.572	(5.72)
5	0	0.497	0
			14.81

Therefore, The maximum Investment that can be made is 15.