Question

Question
Brook is reviewing a project with an initial cash outflow of R250,000. An additional R100,000 will have to be invested after the first year, followed by an additional investment of R50,000 at the end of the second year. Beginning at the end of year 3, the project is expected to generate cash flows of R90,000 per year for the next eight years.

Required
1. Calculate the project’s payback period, IRR, and its NPV and PI at a cost of capital of 8%. [12]
2. If Brook’s cost of capital is 12%, does it change the decision? What about 14%? [3]

Answer 1

Discount rate	8.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(250,000.000)	0	(250,000.00)	(250,000.00)
(100,000.000)	1	(92,592.59)	(342,592.59)
40,000.000	2	34,293.55	(308,299.04)
90,000.000	3	71,444.90	(236,854.14)
90,000.000	4	66,152.69	(170,701.45)
90,000.000	5	61,252.49	(109,448.96)
90,000.000	6	56,715.27	(52,733.70)
90,000.000	7	52,514.14	(219.56)
90,000.000	8	48,624.20	48,404.64
90,000.000	9	45,022.41	93,427.05

NPV = 93,427.05

IRR = 13.30% (use IRR function in Excel)

PI = 1.37

2.

The decision will not change at 12% since it is still below the iRR. However at 14% the NPV will be negative and one must not accept the project.