A recent project nominated for consideration at your company has a four-year cash flow of $20,000; $25,000; $30,000; and $50,000

Question

4 years ago

15

A recent project nominated for consideration at your company has a four-year cash flow of $20,000; $25,000; $30,000; and $50,000

. The cost of the project is $75,000.1.If the required rate of return is 20%, conduct a discounted cash flow calculation to determine the NPV.2.What is the benefit-cost ratio for the project3.Assuming the required rate of return remains 20%, what would the NPV of the above project be if the inflation rate was expected to be 4% in each of the next four years?

Business

1 answer:

Montano1993 [528] · Answer 1 · 2021-11-24T00:35:58+03:00

Answer:

1. $501.54

2. 1.01

3. -$5,728.56

Explanation:

The computations are shown below:

1. For net present value

Year Cash flow Discount factor @20% Present value

0 $75,000 1 $75,000

1 $20,000 0.8333333333 $16,666.67

2 $25,000 0.6944444444 $17,361.11

3 $30,000 0.5787037037 $17,361.11

4 $50,000 0.4822530864 $24,112.65

Total of cash inflows $75,501.54

NPV $501.54

The discount factor should be computed below

= 1 ÷ (1 + rate) ^ years

2. The benefit cost ratio would be

= Total Present value ÷ Initial investment

= $75,501.54 ÷ $75,000

= 1.01

3. 1. For net present value

Year Cash flow Discount factor @20% Present value

0 $75,000 1 $75,000

1 $20,000 0.8064516129 $16,129.03

2 $25,000 0.650364204 $16,259.11

3 $30,000 0.5244872613 $15,734.62

4 $50,000 0.4229735978 $21,148.68

Total of cash inflows $69,271.44

NPV -$5,728.56

The discount factor should be computed below

= 1 ÷ (1 + rate) ^ years