Question

At the end of 2019, Uma Corporation is considering a major long-term project in an effort to remain competitive in its industry. The production and sales departments have determined the potential annual cash flow savings that could accrue to the firm if it acts soon. Specifically, they estimate that a mixed stream of future cash flow savings will occur at the end of the years 2020 through 2025. The years 2026 through 2030 will see consecutive $90,0000 cash flow savings at the end of each year. The firm estimates that its discount rate over the first 6 years will be 7%. The expected discount rate over the years 2026 through 2030 will be 11%.The project managers will find the project acceptable if it results in present cash flow savings of at least $860,000. The following cash flow savings data are supplied to the finance department for analysis.

a.	Determine the value (at the beginning of 2019) of the future cash flow savings expected to be generated by this project.
b.	Based solely on the one criterion set by management, should the firm undertake this specific project? Explain.
c.	What is the “interest rate risk,” and how might it influence the recommendation made in part b? Explain.

Discount rate for years 2020 - 2025			7%
Discount rate for years 2026 - 2030			11%
		Cash	Present
Year	Year (n)	Flow	Value
2020	1	$       110,000
2021	2	120,000
2022	3	130,000
2023	4	150,000
2024	5	160,000
2025	6	150,000
2026	7	90,000
2027	8	90,000
2028	9	90,000
2029	10	90,000
2030	11	90,000

Could you please fill the present value for each year in excel and showing me the formula for each year ?

The concept of interest-rate risk states that changes in the interest rates may adversely affect the value of an investor's securities portfolio. While this is not a securities problem, the relationship between the change in rates and the subsequent change in the value of an asset hold true. If the the interest rates were to rise just 1 percent, the present value of the expected savings would fall below the required $860,000 limit set by mangement. ( That statement is true or false ? )

Could you also write your answers for part b and c, in a professional email format explaining in detail to a direct manager.

Thank you.

Answer 1

Present value for

2020 = 110000/(1.07) i.e. 102803.74

2021= 120000/(1.07)² i.e. 104812.65

2022 = 130000/(1.07)³ i.e. 106118.72

2023 = 150000/(1.07)⁴ i.e. 114434.28

2024 = 160000/(1.07)⁵ i.e. 114077.79

2025 = 150000/(1.07)⁶ i.e. 99951.33

2026 = 90000/(1.11)⁷ i.e. 43349.26

2027 = 90000/(1.11)⁸ i.e. 39053.38

2028 = 90000/(1.11)⁹ i.e. 35183.23

2029 = 90000/(1.11)¹⁰ i.e. 31696.60

2030 = 90000/(1.11)¹¹ i.e. 28555.49

a) the value (at the beginning of 2019) of the future cash flow savings expected to be generated by this project is sum of all the present value of cash flow savings calculated above .The total amounts to 820,036.47 ( all calculations were rounded of to two decimal points).

b)Based solely on the one criterion set by management, it is not viable to accept the project .The reason is ,total value of all present value of cash inflows is $ 820,036.47 which is less than the criteria set by management ,that is $860,000