1.a) A project has an initial cost of $84,272, and promises to pay a fixed cash

Question

1.a) A project has an initial cost of $84,272, and promises to pay a fixed cash flow per year for 3 years. It has been determined that using a discount rate of 14 percent, its net present value is $133,083. What must be the expected annual cash flow?

1.b) A project has the following cash flows for years 1 through 3 respectively: 1,109, 1,237, 1,597. Using a discount rate of 9.3 percent, it has been determined that the profitability index is 1.09. What must the project's initial cost be? (Enter absolute value of the initial cost.)

Explanation / Answer

Problem 1:

The answer is $93,621.64

If NPV is $133,083 then the present value for the payments must be:

$133,083 + $84272 = $217,355

Then calculate payment amount using

i = 0.14

n = 3

PV = $217,355

Annual cash flow of $93,621.64 is required.

Problem 2

Answer will be $3002.88

Calculate present value of $1109 using n = 1, i = .093 we get:

$1014.64

Calculate present value of $1237 using n = 2, i = .093 we get:

$1035.45

Calculate present value of $1597 using n = 3, i = .093 we get:

$1223.05

Add the values together to get: $3273.14

Cost = $3273.14 / 1.09 = $3002.88

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