Question

1...Passero company has a minimum required rate of return of 10%. It is considering investing in a project which costs $135,500 and is expected to generate cash inflows of $41,000 at the end of each year for four (4) years. Attach an MS Excel document showing formulas for 1) the present value of the cash flows, 2) the net present value of this project and 3) the time it takes to get the cash pay back.

2...

A company is considering purchasing factory equipment which costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $225,000 and annual operating expenses exclusive of depreciation expense are expected to be $95,000. The straight-line method of depreciation would be used. If the equipment is purchased, the annual rate of return expected on this project is

3...

The following information was taken from Indriks Company’s cash budget for the month of July:

                              Beginning cash balance             $150,000

                              Cash receipts                                95,000

                              Cash disbursements                   170,000

            If the company has a policy of maintaining a minimum end of the month cash balance of $125,000, the amount the company would have to borrow is

4...A company has a minimum required rate of return of 9% and is considering investing in a project that costs $175,000 and is expected to generate cash inflows of $70,000 at the end of each year for three years.  The net present value of this project is

Answer 1

Solution to the First Question

(i)-The present value of the cash flows

Year	Annual cash inflow ($)	Present Value factor at 10.00%	Present Value of Annual cash inflow ($)
1	41,000	0.909091	37,272.73
2	41,000	0.826446	33,884.30
3	41,000	0.751315	30,803.91
4	41,000	0.683013	28,003.55
TOTAL			1,29,964.48

‘Hence, the present value of the cash flows will be $129,964.48”

NOTE

The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.

(ii)- Net Present Value (NPV) of the Project

The Net Present Value (NPV) of the Project = Present Value of annual cash inflows - Initial Investment

= $129,964.48 - $135,500

= -$5,535.52 (Negative NPV)

“Hence, the Net Present Value (NPV) of the Project will be -$5,535.52 (Negative NPV)”

(iii)-Cash Payback Period

- The Payback Period Method refers to the period in which the proposed project will generate the cash inflows to recover the Initial Investment costs. It considers only three components such as Initial Investment costs, Economic life of the project and the annual cash inflows

- Payback period is the number of years taken to recover the total amount of money invested in the project. If the payback period is less than the enterprises required number of years, then the project should be accepted, Else it is rejected.

-The Payback Period = Initial Investment Cost / Annual cash inflow

The Payback Period for the Project is calculated by using the following formula

Therefore, the Payback Period for SERVER-A = Initial Investment Cost / Annual Cash Inflow

= $135,500 / $41,000 per year

= 3.30 Years

“Hence, the time taken to get the cash pay back will be 3.30 Years”