Question

In: Finance

A five-year project, if undertaken, will require an initial investment of $95,000. The expected cash flows...

A five-year project, if undertaken, will require an initial investment of $95,000. The expected cash flows are:

Year 1: $12,000

Year 2: $39,000

Year 3: $39,000

Year 4: $30,000

Year 5: $18,000

If the appropriate discount rate for this project is 15 percent, what is the value of this project today?

Relevant time for $12,000:?

Relevant time for $39,000:?

Relevant time for second $39,000:?

Relevant time for $30,000:?

Relevant time for $18,000:?

Relevant rate:?

Value of $12,000:?

Value of $39,000:?

Value of second $39,000:?

Value of $30,000:?

Value of $18,000:?

Total value:?

Compared to the initial investment, should this project be undertaken?

Solutions

Expert Solution

1.The value of the project today is calculated by computing the net present value.

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

Press the CF button.
CF0= -$95,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
Cash flow for each year should be entered.
Press Enter and down arrow after inputting each cash flow.
After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 15%.
Press enter after that. Press the down arrow and CPT buttons to get the net present value.

Net present value at 15% discount rate is -$3,330.70.

2.The relevant rate is calculating by computing the internal rate of return.

Internal rate of return can be calculated using a financial calculator by inputting the below:

Press the CF button.
CF0= -$95,000. The initial cash flow is indicated by a negative sign since it is a cash outflow.
Cash flow for each of the fifteen years should be entered.
Press Enter and down arrow after inputting each cash flow.
After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 13.56%.

3.The project should not be undertaken since it generates a negative net present value.

In case of any query, kindly comment on the solution.

jeff jeffy answered 1 year ago

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