Question

1) A company has an opportunity to invest in a project which will earn cash flows of $100,000 in the first year, $200,000 in the second year and $350,000 in the third year. If their investor's required return is 12%, what is the most the company should pay for the project? (Enter only numbers and decimals in your response. Round to 2 decimal places.)

2) A business has an project that will bring in annual cash flows of $250,000 for 8 years. The company's investor's require a return of 12%. What is the most the company should pay for the project? (Enter only numbers and decimals in your response. Round to 2 decimal places.)

Answer 1

The amount that the company would be willing to pay for the project is the present value of the future cash inflows discounted at the required rate of return

Solution to PART-1

Year	Annual cash inflow ($)	Present Value factor at 12.00%	Present Value of Annual cash inflow ($)
1	1,00,000	0.8928571	89,285.71
2	2,00,000	0.7971939	1,59,438.78
3	3,50,000	0.7117802	2,49,123.09
TOTAL			497,847.58

“The amount that the company would be willing to pay for the project will be $497,847.58”

Solution to PART-2

Year	Annual cash inflow ($)	Present Value factor at 12.00%	Present Value of Annual cash inflow ($)
1	2,50,000	0.8928571	2,23,214.29
2	2,50,000	0.7971939	1,99,298.47
3	2,50,000	0.7117802	1,77,945.06
4	2,50,000	0.6355181	1,58,879.52
5	2,50,000	0.5674269	1,41,856.71
6	2,50,000	0.5066311	1,26,657.78
7	2,50,000	0.4523492	1,13,087.30
8	2,50,000	0.4038832	1,00,970.81
TOTAL			1,241,909.94

“The amount that the company would be willing to pay for the project will be $1,241,909.94”

NOTE

The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.