75) A firm wants to start a project. A team of financial analysts estimated the

Question

75) A firm wants to start a project. A team of financial analysts estimated the following cash flows cash flow $90,000 55,000 43,000 45,000 year 0 Suppose that the discount rate (interest rate) is 12%. The NPV is a) S-11,627.12 b) $10,206.14 c) $115,416.59 d) $25,416.59 76) According to your calculation of the NPV in the previous question we should a. undertake the project b. not undertake the project c. undertake the project in the short run and do not under take it in the long run d. we cannot decide because we do not have enough information 77) Based on question (75), the pay-back period is a. 2.00 years b. 1.28 years c. 1.81 years d. 2.89 years 78) Based on question (77), if the cut-off point is 2 years, we should a. undertake the projedt b. not undertake the project c. cannot decide because we do not have enough information d. none of the above

Explanation / Answer

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

NPV = $25416.59

76 - a. Undertake the project as the NPV is positive.

77-

Payback period = A + B/C

Where,
A = Last period with a negative cumulative cash flow;
B = Absolute value of cash flow at the end of the period A;
C = cash flow during the period after A.

Payback period = 1 + 35000/43000 = 1.81 years

78.

Undertake the project, since the payback period is less than the cur-off point of 2 years.

Rate 12.00% Year Cashflow (A) Discount rate = 1/(1+r)^(n) Present value of cashflow = A*discount rate 0 -90000.00 1.00 -90000.00 1 55000.00 0.89 49107.14 2 43000.00 0.80 34279.34 3 45000.00 0.71 32030.11 NPV 25416.59

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