please show full working out PROBLEM7 Assume that you are considering undertakin

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PROBLEM7 Assume that you are considering undertaking a project that would return A$400,000 at the end of 3 years and A$6800,000 at the end of 5 years. Considering the fisks associated with the type of project, your organization has set the minimum acceptable rate of return for the project as 15%. The project requires investments in two equal instalments over the first two conseculive ye What is the Net Present Value (NpV) of the expected revenue at a discount rate equal to the minimum acceptable rate of return? i. (14 What is the maximum amount you can invest per instalment to achieve the minimum acceptable rate of returm? ii.

Explanation / Answer

Lets denote the Year 0 (immediate) & 1 (end of Year 1) installments by x. The discount rate is given at r = 15%. The NPV equation will be as below:

NPV = - x - x/(1+15%) + 0 + 400000/(1+15%)3 + 0 + 600000/(1+15%)5

Now to achieve atleast the minimum acceptable return, we should equate NPV = 0; re-arranging we get:

x + x/(1+15%) = 400000/(1+15%)3 + 600000/(1+15%)5 or x + x/(1+15%) = 561312.5

solving for x, we get x = 300237

Hence the first 2 year installments should be A$ 300,237

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