6a)You have the following capital budgeting timeline with their periods and cash

Question

6a)You have the following capital budgeting timeline with their periods and cash flows: 0 = ?, 1 = $4500, 2 = $4900, 3 = ?, 4 = ?, 5 = $4000, 6 = $3750. The terminal value of the project is $34,806.73. The NPV = $1311.33 and the cash flow in period 4 can decrease by $1847.66 and the project remains minimally acceptable. What is the amount of the initial cash outflow at period 0? The cash flows in periods 3 and 4 are positive.

6b)You have the following capital budgeting timeline: 0 = ($21,000), 1 = $6109, 2 = $7276, 3 = ?, 4 = $4902, 5 = $4195, 6 = $6986. The discounted payback for the timeline is 4.626. k = 9.85%. What is the amount of the missing cash flow in period 3?

Explanation / Answer

Amount of initial cash flow at Y0 = $ 13,769. Calculation as below :

6b) Missing Cash flow for year 3 is $ 6677.61

                                 0.91

Calculation = Since dicounted payback is 4.626 , therefore , the negative cash foow is after 4 years. So 0.626 is the proportion in 5 year.

4th year cumulative cash flow = Disc cash flow in 5th year * 0.626 i.e, 2622.6 * 0.626 = $ 1641.75.

So cumulative cash flow at the end of 3rd year is = Disc Cash flow for 4th year + Cum disc cash for 4th year= 3366.46+ 1641.75 = $ 5008.21.

Therefore, actual cash flow without the PV factor = 5008.21 / 0.75 = $ 6677.61.

Year Cash flows 0    13,769.00 1      4,500.00 2      4,900.00 3      3,500.00 4      1,652.34 5      4,000.00 6      3,750.00 NPV $1,311.36

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