Question

Problem 3: A potential CB project has the following cash flows: CFO = -$500, CF1 = $300, CF2 = $200, CF3 = $150. WACC = 6%. Compute the following: V CPT DPB & NFV CPT (EX) A. Payback Period 3. NPV 86.9610 Accept project 2. IRR 16.4634 76 Accept project.

Answer 1

NPV is sum of present value of all cash flows.              
Present value of cash flows = cash flows * PVF              
              
PVF formula = 1/(1+Discount rate)^period              
For year 1, PVF = 1/(1+6%)^1=   0.9433962264          
For year 2, PVF = 1/(1+6%)^2=   0.88999644          
and so on.              
Project payback period is time period required to recover the cost of an investment. In other words, how long it will take to pay the investment back.              
              
              
For payback We will calculate Cumulative present value of cash flow              
Year   cash inflows   PVF@6%   PV of cash flows   Cumulative cash inflows
year 0   -500   1   -500   -500
Year 1   300   0.9433962264   283.0188679   -200
Year 2   200   0.88999644   177.999288   0
Year 3   150   0.839619283   125.9428925   150
              
              
NPV=           86.96104837  
              
Payback year = year before positive cumulative cash flow + (cumulative cash flow to make cum. cash flow to 0/Cash flow of first positive cumulative CF)              
   2 +0/0          
              
Payback period   2   years      
              
IRR =    16.46%          
              
IRR function = irr(CF0:CF13)              
              
NPV is positive and IRR is greater than 6%, so accept the project