Question

Question 4                                                                            25 Marks

Jimmy Reynolds is considering investing R12,000 in a project with the following cash revenues and expenses:

   Revenue    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

Solution:-

A) Net cash inflows for the 5 years
			Amount in R
A	B	C	D
Years	Revenue	Expenses	Net cash in flows (B-C)	Cumulative Net cash inflow
1	20,000	18,000	2,000	2,000
2	22,000	19,000	3,000	5,000
3	22,000	20,000	2,000	7,000
4	22,000	17,000	5,000	12,000
5	25,000	17,000	8,000	20,000
Total	1,11,000	91,000	20,000	46,000
B) Payback period
Payback period = Intial investment/Net annual cash inflows
Given
Initial investment = R12000
In the fourth year cumulative cash flow is equal to intial investment
Project takes 4 years to get back initial investment
C) Net present value of the invenstment
Net present value = Intial investment - present value of cash inflow in coming year's
A	B	C	D = (B*C)
Years	Cash flow	Discounting factor @8%	Net present value
0	(12000)	1.000	(12000)
1	2000	0.925	1850
2	3000	0.857	2571
3	2000	0.793	1586
4	5000	0.735	3675
5	8000	0.680	5440
		Net present value	3122

Discounting factor = 1/(1+r)n

Where,

r = Discounting rate

n = Number of year's

For example

Discounting factor for year 1

1/(1.08)1 = 0.925