Question

JS: Capital budgeting JS company is considering an investment that requires an outlay of $100,000 today. Cash inflow from the investment are expected to be $10,000 for year 1-3, and $30,000 for year 4, 5, 6, 7, and 8. You require a 20% rate of return on this type of investment. Answer the following questions: 1. First draw the time line and specify the cash outflow and inflow for each period. 2. Calculate the net present value. 3. Calculate the Internal rate of return of this investment. 4. Calculate the payback periods 5. Shall the investment be undertaken? Please report the answer in the following multiple choices. a Discount rate 0.20 year cash flow 00 vauw NO py of cash flow since yr нь npv IRR C d payback perioe yes or no? е Use the attached spreadsheet to finish the calculations. Then report the results with the following multiple choice questions.

JS-1: How long is the payback period?

a) 5.13

b) 6

c) 5.33

d) 5

JS-2: How much is the present value of future cash flow between year 1 and year 8?

a) 83698

b) 71381

c) 72890

d) 72985

JS-3: How much is the net present value calculated as the present value of all future cash flows deducted by the initial investment?

a) -72985

b) 72985

c) -27014

d) 27014

JS-4: How much is the Internal Rate of Return (IRR)?

a) 13.32%

b) 10.82%

c) 12.23

d) 12.23%

JS-5: Shall we accept the project?

True

False

Answer 1

As stated, JS company is considering an investment that requires an outlay of $100,000 today.

Cash inflow expected to be $10,000 for year 1 to 3, $30,000 for the year 4, 5, 6, 7 and 8.

Discount rate = 20%

a)

Year	Cash flow
0	$       -1,00,000
1	$             10,000
2	$             10,000
3	$             10,000
4	$             30,000
5	$             30,000
6	$             30,000
7	$             30,000
8	$             30,000

b) To find the present value of Cash flow for each period the formula used is:

Cash Flow/(1+ Discount rate)ⁿ where n is the number of years

Year	Cash flow	PV of cash flow
0	$       -1,00,000
1	$             10,000	$           8,333.33
2	$             10,000	$           6,944.44
3	$             10,000	$           5,787.04
4	$             30,000	$         14,467.59
5	$             30,000	$         12,056.33
6	$             30,000	$         10,046.94
7	$             30,000	$           8,372.45
8	$             30,000	$           6,977.04
	Total	$         72,985.16

NPV will be the PV of cash flows + Initial Capital outlay = $72,985.16 + (- $100,000) = - $27,014.84

c) For IRR, we have used the IRR forumla in excel -

Formula in Cell D15 = IRR(C3:C11)

AB C D Discount rate 20% Year Cash flow PV of cash flow 0 $ -1,00,000 1 $ 10,000 $ 8,333.33 21 $ 10,000 $ 6,944.44 3 $ 10,000 $ 5,787.04 4 $ 30,000 $ 14,467.59 5 $ 30,000 $ 12,056.33 6 $ 30,000 $ 10,046.94 7 $ 30,000$ 8,372.45 8 $ 30,000 $ 6,977.04 Total $ 72,985.16 $ NPV IRR 27,014.84 12.23%

d) Payback period is the time required to recover the initial cost of investment. It is the number of years it would take to get back the initial investment made in a project.

Payback period = last year of negative cumulative cash flow + (absolute value of last year where the cumulative cash flow was negative/cash flow of the very next year)

Year	Cash flow	PV of cash flow	Cumulative cash flow
0	$       -1,00,000		$                      -1,00,000
1	$             10,000	$           8,333.33	$                          -90,000
2	$             10,000	$           6,944.44	$                          -80,000
3	$             10,000	$           5,787.04	$                          -70,000
4	$             30,000	$         14,467.59	$                          -40,000
5	$             30,000	$         12,056.33	$                          -10,000
6	$             30,000	$         10,046.94	$                            20,000
7	$             30,000	$           8,372.45	$                            50,000
8	$             30,000	$           6,977.04	$                            80,000

Cumulative cash flow here is calculated by like say for cell E4 = E3+C4

Last year where the cash flow is negative is 5th year with the cash flow being - $10,000 and subsequent CF = $ 20,000

Payback period = 5 + (-(-10,000)/30000) = 5.33 years

e) The investment should not be undertaken as IRR < discount rate and the NPV is negative.

JS-1) c)

JS-2) d)

JS-3) c)

JS-4) d)

JS-5) False