Question 23 3 pts Assume that your company is considering undertaking a project

Question

Question 23 3 pts Assume that your company is considering undertaking a project that would return A$434700 at the end of 3 years and A$593040 at the end of 5 years. Considering the risks associated with the type of project, your company has set the minimum acceptable rate of return for the project as 141% The project requires investments in two equal instalments. The first instalment of the investment needs to be made today and the second instalment of the investment needs to be made exactly after one year from today Determine the maximum amount that can be invested in each of the instalments. [Input your answer up to two decimal places.]

Explanation / Answer

Step-1:Present value of future cash inflows Year Future Cash flows Present value of 1 Present Value of Future Cash inflows a b c=1.141^-a d=b*c 3 $       4,34,700 0.673198 $       2,92,639 5 $       5,93,040 0.517097 $       3,06,659 Total $       5,99,298 Step-2:Calculation of equal installment amount Maximum amount that can be invested will be the present value of equal installment equal to the above amount. Suppose amount of equal installment is "x' Year Installment amount Present value of 1 Present Value of Future Cash inflows a b c=1.141^-a d=b*c 0 x 1.0000 x 1 x 0.87642 0. 87642 x Total 1.87642x now, as per question, 1.87642x = $       5,99,298 or, x = $ 3,19,383.92 Thus, maximum amount that can be invested in each of the installment is $ 3,19,383.92

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