Question

4. If you have the following information about an investment opportunity:
   1. Initial investment (cash out- required capital) is $ 500,000
   2. Expected operating cash inflows( after considering taxes) in year (1) $ 200,000, in year (2) $ 260,000, in year (3) $ 250,000, & in year (4) $ 150,000

Calculate the payback period, the net present value if the cost of capital is % 15%, & also calculate the internal rate of return?

Excel will do

Answer 1

Computation of Payback Period: Year Cash Flows ($) Cumulative Cashflows $ (5,00,000) (5,00,000) 2,00,000 2,60,000 2,50,000 1,50,000 (3,00,000) (40,000) 2,10,000 3,60,000 Payback period is = 2 years+(40000/250000) Payback period is = 2.16 years Computation of Net Present Value @15%- Cash Present Year PVF@15% Flows (5) Value ($) (5,00,000) 1.00000 (5,00,000) 2,00,000 0.86957 1,73,913 2,60,000 0.75614 1,96,597 2,50,000 0.65752 1,64,379 1,50,000 0.57175 85,763 Net Present Value 1,20,652 Net Present Value is $ 120,652). Approx. Internal rate of return is the rate at which present value of cashflows will be equal to ZERO. Using trial and error method Internal rate of return is caluclated as below:- Year Computation of Internal Rate of Return @15% Cash PVF@ Present Flows ($) 26.8104% Value ($) (5,00,000) 1.00000 (5,00,000) 2,00,000 0.78858 1,57,716 2,60,000 0.62186 1,61,683 2,50,000 0.49038 1,22,596 1,50,000 0.38671 58,006 Net Present Value Internal rate of return is 26.81% Approx.