Question

In: Finance

Consider a project that costs $5000 and has an expected future cash flow of $1000 per...

Consider a project that costs $5000 and has an expected future cash flow of $1000 per year for 20 years. If we wait one year, the cost will increase to $5500 and the expected future cash flow will increase to $1200. If the required return is 13%, should we accept the project? If so, when should we begin?

Thank you.

Expert Solution

Let’s compare both the options by computing NPV of each one.

NPV = PV of future cash inflows – Initial investment

Project started now:

NPV = $ 1,000 x PVIFA (13 %, 20) - $ 5,000

= $ 1,000 x [1- (1+0.13)^-20/0.13] - $ 5,000

= $ 1,000 x [1- (1.13)^-20/0.13] - $ 5,000

= $ 1,000 x [(1- 0.0867822948516793)/0.13] - $ 5,000

= $ 1,000 x (0.9132177051483207/0.13) - $ 5,000

= $ 1,000 x 7.024751578064 - $ 5,000

= $ 7,024.75157806401 - $ 5,000

= $ 2,024.75157806401 or $ 2,024.75

Project started after one year:

NPV in one year = $ 1,200 x PVIFA (13 %, 20) - $ 5,500

= $ 1,200 x 7.024751578064 - $ 5,500

= $ 8,429.70189367681- $ 5,500

= $ 2,929.70189367681

NPV now = $ 2,929.70189367681/ (1+0.13)

= $ 2,929.70189367681/1.13

= $ 2,592.65654307682 or $ 2,592.66

Project is acceptable for discount rate of 13 % as NPV is positive.

It is preferable to begin the project next year as NPV is higher if the project started in one year rather than started now.

jeff jeffy answered 1 year ago

Consider a project with a cost of $1000, with the following expected cash inflows, and a...

Consider a project with a cost of $1000, with the following expected cash inflows, and a WACC of 16%. YEAR 1 $300--Year 2 $400- year 3 $300- Year 4 $500 Show your calculations by way of formulas, numerical values and if you like also by EXCEL for the following. A. Calculate the present value of cash inflows. B. Calculate the net present value of cash inflows. C. Calculate the internal rate of return IRR. D. Calculate the modified internal rate...

A project costs $1000 today and will generate a cash flow of $3173 three years from...

A project costs $1000 today and will generate a cash flow of $3173 three years from now. If the interest rate is 3%, what is the net present value of the project?

A proposed project has fixed costs of $43,000 per year. The operating cash flow at 8,000...

A proposed project has fixed costs of $43,000 per year. The operating cash flow at 8,000 units is $78,000. Required: (a) Ignoring the effect of taxes, what is the degree of operating leverage? (b) If units sold rise from 8,000 to 8,500, what will be the increase in operating cash flow? (c) What is the new degree of operating leverage?

4. A project with fixed costs of 320,000 and operating cash flow of 160,000 was expected...

4. A project with fixed costs of 320,000 and operating cash flow of 160,000 was expected to sell 11,000 units. The final results for the year were that 9,800 units were sold instead. What is the degree of operating leverage? __________________ What is the percentage change in quantity? _________________ What is the percentage change in operating cash flow? ________________ What would the operating cash flow be under the actual level of production? __________________ 7. Colby is in the furniture moving business. He has...

A production project will generate an expected operating cash flow of $50,000 per year for 4...

A production project will generate an expected operating cash flow of $50,000 per year for 4 years (years 1 – 4). Undertaking the project will require an increase in the company’s net working capital (inventory) of $10,000 today (year 0). At the end of the project (year 4), inventory will return to the original level. The project would cost $150,000. The marginal tax rate is 35%. The weighted average cost of capital for the firm is 9%. Sketch a timeline...

AS is evaluating a project that is expected to generate the following cash flow stream: Expected...

AS is evaluating a project that is expected to generate the following cash flow stream: Expected Cash Flow Now -R 100,000 End-of-year 1 R 50,000 End-of-year 2 R 50,000 End-of-year 3 R 50,000 Required: 2.1. If the project’s cost of capital is 12 per cent, what is the present value of the project’s expected cash flow stream? 2.2. What is the net present value of the project?

Project B costs $52,125. The project’s cash revenues are expected to be $12,000 per year for...

Project B costs $52,125. The project’s cash revenues are expected to be $12,000 per year for 5 years. If the WACC is 12%, what is the project's simple payback period? 0.23 years 2.22 years 4.34 years 5.94 years 10.01 years

Project P costs $10,400 and is expected to produce cash flows of $3,650 per year for...

Project P costs $10,400 and is expected to produce cash flows of $3,650 per year for five years. Project Q costs $30,000 and is expected to produce cash flows of $9,250 per year for five years. a. Calculate the NPV, IRR, MIRR, and traditional payback period for each project, assuming a required rate of return of 8 percent. b. If the projects are independent, which project(s) should be selected? If they are mutually exclusive, which project should be selected?

Spence Company is considering a project that has the following cash flow data, Year 0: -$1000,...

Spence Company is considering a project that has the following cash flow data, Year 0: -$1000, Year 1-5: $350 each, Year 6: -$300. The company is using a WACC of 8%. What is the NPV of the project . What is the IRR of the project? What’s the discounted payback of the project

1. Consider the Following 10-year project: Year Cash Flow 0 -30000 1 2500 2 5000 3...

1. Consider the Following 10-year project: Year Cash Flow 0 -30000 1 2500 2 5000 3 6750 4 7000 5 7250 6 6000 7 6250 8 8000 9 3750 10 2000 Complete the following questions on excel: What is the Payback Period for the project? What is the Discounted Payback Period for the project at 12% required rate of return? What is the NPV of the project if the required rate of return is 12% What is the PI of...