Question

CAPITAL EXPENDITURE DATA FOR PROJECT A

Initial Investment	Expected Cash Inflows
$10,000	Year 1 $1,000	Year 2 $2,000	Year 3 $2,000	Year 4 $5,000	Year 5 $2,000

a. Calculate payback period for Project A.

b. If the cash inflow in Year 4 were $6,000 instead of $5,000, calculate the payback period.

c. If an investment yields $1,000 a year from now, then how much is it worth today if the cost of money is 10%, using discounted cash flows (DCF)?

e. Investment A will generate $100,000 two years from now and investment B will generate $110,000 three years from now. If the cost of capital is 15%, which investment is better? (using discounted cash flows (DCF))

f. Calculate Net Present Value (NPV) for Project A, and decide whether accept or reject the project.

Answer 1

a. 4 years, it is where cumulative cashflow is zero

Year	Cashflow	Cumulative cashflow
0	-10000
1	1000	-9000
2	2000	-7000
3	2000	-5000
4	5000	0
5	2000	2000

b.

Year	Cashflow	Cumulative cashflow
0	-10000
1	1000	-9000
2	2000	-7000
3	2000	-5000
4	6000	1000
5	2000	3000

formula = A+(B/C)

A = year of negative cumulative cash flow

B = absolute last negative cumulative cash flow

C = csah flow value of first positive cumulative cash flow

=3+(5000/6000)

= 3.833 years

c It is worth 909.09, DF = 1/(1+0.1)^1, DCF= cashflow*DF

Year	Cashflow	DF	Discounted cashflow
1	1,000	0.909	909.09

e. Investment A is better as its discounted cashflow is greater than investment B

Year	Cashflow	DF	Discounted cashflow
2	1,00,000	0.756	75614.37
3	1,10,000	0.658	72326.79

f. Since the NPV is negative at 15%, it is better to reject the project

Year	Cashflow	DF	DCF
0	-10000	1	-10000.00
1	1000	0.87	870.00
2	2000	0.76	1520.00
3	2000	0.66	1320.00
4	6000	0.57	3420.00
5	2000	0.5	1000.00
		NPV	-1870.00