Consider a project with the following cash flows: $3,500 at t=1, $12,500 at t=2,

Question

Consider a project with the following cash flows: $3,500 at t=1, $12,500 at t=2, $15,000 at t=3, $15,000 at t=4. The Discounted Payback Period of this project is 3.3 years. The appropriate discount rate is 11%. Find the Net Present Value of the project. (Note that the cash flow for t=0 is not provided to you.) A.  $6,916.67 B.  ($11,852.73) C.  ($1,627.27) D.  $4,952.58 E.  Insufficient information. Consider a project with the following cash flows: $3,500 at t=1, $12,500 at t=2, $15,000 at t=3, $15,000 at t=4. The Discounted Payback Period of this project is 3.3 years. The appropriate discount rate is 11%. Find the Net Present Value of the project. (Note that the cash flow for t=0 is not provided to you.) A.  $6,916.67 B.  ($11,852.73) C.  ($1,627.27) D.  $4,952.58 E.  Insufficient information.

Explanation / Answer

A.  $6,916.67

Working:

a. Calculate cost of project Year Cash flow Discount factor Present Value Cumulative Present Value 1 $         3,500                   0.9009 $         3,153.15 $                                  3,153.15 2 $       12,500                   0.8116 $      10,145.28 $                                13,298.43 3 $       15,000                   0.7312 $      10,967.87 $                                24,266.30 4 $       15,000                   0.6587 $         9,880.96 $                                34,147.27 Discounted Cash flow in year 4 to get Cost of investment = $     9,880.96 x 0.3 = $     2,964.29 Cost of Project = Present Value of cash inflows in 3.3 years = $      24,266.30 + $     2,964.29 = $      27,230.59 b. Calculation of Net Present Value Present Value of cash inflows $ 34,147.27 Cost of Project $ -27,230.59 Net Present Value $ 6,916.68

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