Question

15, FOI Valuatien 3 pc is considering the following cash flows for country K that sequires an initial invest of ES tiinge arthin CO00 Year 2 1200 tear 1 Year 3000 800 al Calculate the NPV using the companies weighed eaf opl of 12 per cent-i the project worth undertaking? b A director points out that as the invetmentincountry t appropriate discount sate would be 25 reconsider your answer A second director argues thar the risk i granted to mine are eath raanot gat los of about E300 c00 Reconsider your an cent o part (a fact about dA thind dieector points eut tht sheud almost certainly in for Oher depsots are thought to be prest e identity the real otonand ee theo cence and is ely to collebo Reconide ANSWER

this is a better picture of the question sorry for the first picture

Answer 1

A,

NAV(net present value)= present value of future cash flow - initial investment

= 30188216.69 - 2500000

= 518216.69

PV CF= CF1/ (1+r)ⁿ + CF2/ (1+r)ⁿ+ .......CFk/ (1+r)k

= 800000/(1.12) + 1200000/(1.12)²+ 1000000/1.12³+ 1000000/1.12⁴

= 714285.71 + 956632.65 + 711780.24 + 635518.078

= 30188216.69

B.   

  NAV(net present value)= present value of future cash flow - initial investment

= 2329600 - 2500000

= -170400

PV CF= CF1/ (1+r)ⁿ + CF2/ (1+r)ⁿ+ .......CFk/ (1+r)k

    = 800000/(1.25) + 1200000/(1.25)²+ 1000000/1.25³+ 1000000/1.25⁴

= 2329600

C. lets consider that 50% probability that licence will be granted and 50% probability that licence will not granted

I if we consider 12% interest rate.

NAV = (518216*0.50) + ( -300000*0.50) if licence will not granted then NAV will be - 300000

= 259108 + (-150000)

=109108

ii if we consider 25% int rate

NAV = ( -170400*0.50) + ( -300000*0.50)

= -(85200) + (-150000)

= -235200

D.

if XH will not go a head then they will withdraw plan immediately with loss of 300000 so NAv will be -300000