Question

14. The following table shows the cash flow for the costs of the Self Performing Contractor and estimates for revenues from a residential project. (in x1000 TL) a) Calculate the Net Cash Flow and the Cumulative Cash Flow for the project (2 points) b) What is the payback period for the project? (2 points) c) What is the Net Present Value (NPV) of the project to the Self Performing Contractor, if the discount rate is i=7% (3 points). d) Would you invest in this project? Explain why?/why not? (2 points) Parameter Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Costs -1,000 -500 -1,500 -2,000 -2,000 -1,000 -1,000 Revenues 0 0 2,500 4,000 5,000 3,000 2,000 1,000 1,000 Net Cash Flow Cumulative Cash Flow

Answer 1

Note: ( in *1000 TL )

a.

Calculation of Net cash flows = Revenues - Costs

Calculation of cummulative cash flows = Sum of Net cash flows

Solution is as under;

Years. Net cash flows. Cumulative cash flows

0. 0-1000= -1000 -1000= -1000

1. 0-500= -500 -1000-500= -1500

2. 2500-1500=1000 -1500+1000= -500

3. 4000-2000= 2000 -500+2000= 1500

4. 5000-2000=3000 1500+3000=4500

5. 3000-1000=2000 4500+2000=6500

6. 2000-1000=1000 6500+1000= 7500

7. 1000-0= 1000 7500+1000=8500

8. 1000-0=1000 8500+1000=9500

b.

For calculating pay back period, we should find the present value of all the costs incurred in different years.(Discount rate @ 7%)

a.Years	b.cost	c.discounting factor(7%)	b*c
0	1000	1	1000
1	500	0.935	467.5
2	1500	0.873	1309.5
3	2000	0.816	1632
4	2000	0.762	1524
5	1000	0.713	713
6	1000	0.666	666
7	-	-	-
8	-	-	-
Total			7312

Present or dicounted value of costs = 7312

Revenue for first four years is 11500, 4 years. = 11,500

For x years. = 7312

We have to find x( pay back period), = 4*7312/11500 = 2.54 years

c.

Net present value = Sum of present values of revenues - sum of present values of costs

a.Year	b.cost	c.revenue	d.Discounting factor (7%)	e.Discounted cost (b*d)	f.Discounted revenue (c*d)
0	1000	-	1	1000	-
1	500	-	0.935	467.5	-
2	1500	2500	0.873	1309.5	2182.5
3	2000	4000	0.816	1632	3264
4	2000	5000	0.762	1524	3810
5	1000	3000	0.713	713	2139
6	1000	2000	0.666	666	1332
7	-	1000	0.623	-	623
8	-	1000	0.582	-	582
Total				7312	13932.5

Net present value= f-e (from table)

= 13932.5 - 7312 = 6620.5

d. Yes, we can invest in the project. The reason is, net present value is positive.