Question

1. If you are offered to invest an amount of $ 100,000 in a business opportunity that expected to achieve operating cash inflow after considering taxes (net of taxes & before depreciation) in the future as follows:

Year (1) $ 32,000, Year (2) $ 35,000, Year (3) $ 40,000, & Year (4) $ 25,000

Would you accept this business opportunity if the required rate of returns is 15%?

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2. If you have the following information about an investment opportunity:
   1. Initial investment (cash out- required capital) is $ 500,000
   2. Expected operating cash inflows( after considering taxes) in year (1) $ 200,000, in year (2) $ 260,000, in year (3) $ 250,000, & in year (4) $ 150,000

Calculate the payback period, the net present value if the cost of capital is % 15%, & also calculate the internal rate of return?

Answer 1

Dear student, only one question is allowed at a time. I am answering the first question

We have to calculate the net present value of the proposal. Net present value

= Present value of inflows – Present value of outflows

Present Value Factor

= 1 / ( 1 + Rate of interest ) ^ Number of years

Where,

Rate of interest = 15% or 0.15

Years = 0 to 4

For example, PV Factor for year 2 will be

= 1 / ( 1.15 ^ 2)

= 1 / 1.3225

= 0.756144

The following table shows the calculations

Calculations	Years	0	1	2	3	4
A	Cash Flows	(100,000)	32,000	35,000	40,000	25,000
B	PV Factor	1	0.8695652	0.7561437	0.6575162	0.5717532
C = A x B	Present Values	(100,000.00)	27,826.09	26,465.03	26,300.65	14,293.83
D = Sum C	Net Present Value	(5,114.40)

As we can find that the net present value is negative. It means that the project will not generate the required rate of return of 15% and will generate return lower than 15%. So, the project should not be accepted