The present $ cash flow distribution associated with a five-year project is show

Question

The present $ cash flow distribution associated with a five-year project is shown below. Assuming that an inflation rate of 6% per annum is expected over the next eight years, and using a minimal accepted rate of return of 15% when appropriate, determine the following: The project's payback period/ [2.5 yrs] The project's present value ratio. [2.12] Instead as assuming a constant annual inflation rate of 6% as described above, suppose that the inflation rate is expected to vary as indicated below. Determine the project's net present value under these conditions. [$12.25x10^6]

Explanation / Answer

a. Payback Period

Payback Period = 2 years + [10 - 8.5] / [13.5 - 8.5]

= 2.3 years

Year Cash Inflows Cumulative Cash inflows 1 4 4 2 4.5 8.5 3 5 13.5 4 5.5 19 5 6.5 25.5

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