Question

Kiewitt is considering a project opportunity that requires a lump sum of initial investment (cash outflow) of $604.02 today. This project is expected to generate cash inflows of $150 in year 1, $Y in year 2 (due to uncertainty), $250 in year 3 and $300 in year 4. If Kiewitt requires 11% annual return for this project, what would be the minimum expected cash flow in year 2 (what is Y)?

A. $88.65

B. $109

C. $200

D. $275

E. $515

Answer 1

Let assume the cash outflow in year 2 as Y.

Since we are required to compute the minimum expected cash flow of year 2 that means that the NPV of the Project is 0.

Calculating the NPV of project by taking Year 2 cash flow as Y:-

Year	Cash Flow of Project ($)	PV Factor @11%	Present Value of Project ($)
0	(604.02)	1.00000	(604.020)
1	150.00	0.90090	135.135
2	Y	0.81162	0.813Y
3	250.00	0.73119	182.798
4	300.00	0.65873	197.619
		NPV	-88.468+0.813Y

0 = -$88.468 + 0.813Y

$88.468 = 0.813Y

Y = $108.82

So, the minimum expected cash flow in year 2 is $108.82

Option B

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