29. Consider a project with the following cash flows Year t=0 t=1 S7,500 S12,500

Question

29. Consider a project with the following cash flows Year t=0 t=1 S7,500 S12,500 $15,000 S17,500 The Payback Period of this project is 2.5 years. The appropriate discount rate is 13%. Find the Net Present Value of the project. (Note that the cash flow for t=0 is not provided to you-that is, you must first solve for it) 30. If the cost of capital for the project shown below is 3.5 percentage points less than the project's IRR (for example, if the project's IRR is 12%, the cost of capital is 8.5%), what is the NPV of the project? Cash Flow ($210,000) S40,000 $50,000 S60,000 $60,000 $70,000 $70,000

Explanation / Answer

29.

Given the payback period is 2.5 years

So initial investment is the sum of first two years and half of third year cashflow = 7500 + 12500 + 15000/2 = 27500

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

NPV = -27500 + 7500/(1+0.13)^1 + 12500/(1+0.13)^2 + 15000/(1+0.13)^3 + 17500/(1+0.13)^4 = 10055.33

NPV = $10055.33

30.

NPV = -210000 + 40000/(1+0.085)^1 + 50000/(1+0.085)^2 + 60000/(1+0.085)^3 + 60000/(1+0.085)^4 + 70000/(1+0.085)^5 + 70000/(1+0.085)^6 = 49067.40

NPV = $49067.40

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