Question

Question 4 25 Marks Jimmy Reynolds is considering investing R12,000 in a project with the following cash revenues and expenses: Revenues Expenses Year 1 R20,000 R18,000 Year 2 R22,000 R19,000 Year 3 R22,000 R20,000 Year 4 R22,000 R17,000 Year 5 R25,000 R17,000 Jimmy requires a minimum rate of return of 8%. A. Calculate the net cash inflows in each of the 5 years. B. What is the payback period? C. What is the net present value of the investment?

Answer 1

A) Calculation for net cash inflows in 5 years

Year	(A) cash revenues	(B) Expenses	(C) net cash inflows [ A- B]
1	20,000	18,000	2,000
2	22,000	19,000	3,000
3	22,000	20,000	2,000
4	22,000	17,000	5,000
5	25,000	17,000	8,000
Total net cash inflows =			R 20,000

B) Calculation for payback period

Year	Net cash inflows	Cumulative cash inflows
1	2,000	2,000
2	3,000	5,000
3	2,000	7,000
4	5,000	12,000
5	8,000	20,000

Payback period = 4 years. Because at the end of 4th year net present value of total cash inflows ( from 1st year end to 4th year end will be equal as the initial investment) .

C) Calculation for net present value

Year	net cash inflows	discounting factor (8%)	discounted cash inflows
1	2,000	0.926	1,852
2	3,000	0.857	2,571
3	2,000	0.794	1,588
4	5,000	0.735	3,675
5	8,000	0.681	5,448
Present value of total cash inflows =			15,134
Less: initial investment			12,000
Net present value of the investment =			3,134