XYZ is considering a new project that will involve a large initial investment an

Question

XYZ is considering a new project that will involve a large initial investment and then result in a series of positive cash flows for six years. The estimated cash flows are as follows:
Initial Investment $1750 million
Cash Flow in Year 1 $250 million
Cash Flow in Year 2 $275 million
Cash Flow in Year 3 $300 million
Cash Flow in Year 4 ?
Cash Flow in Year 5 $325 million
Cash Flow in Year 6 $350 million

What will be the approximate expected cash flow in year 4, if the project has a net present value of $100 million at 7% discount rate?

Explanation / Answer

NPV of Project = P.V. of Annual Cash Inflows - Initial Investment

Let the cash flow of year 4 be C.

The Table for calculation of NPV will look Like this:

Putting the values of last column in equation form:

100 = -1750 + 233.64 + 240.20 + 244.89 + 0.7629C + 231.72 + 233.22

100 = 0.7629C - 566.33

0.7629C = 666.33

C = 666.33 / 0.7629

C = $873.42 (Answer)

Cash flow for year 4 => $873.42 million

Year Cash Flow P.V. Factor of 7% P.V. of Cash Flows 0 $ (1,750.00) 1.0000 $               (1,750.00) 1 $       250.00 0.9346 $                     233.64 2 $       275.00 0.8734 $                     240.20 3 $       300.00 0.8163 $                     244.89 4 C 0.7629 0.7629C 5 $       325.00 0.7130 $                     231.72 6 $       350.00 0.6663 $                     233.22 NPV $                     100.00

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