Question

1. For the following cash flows, compute the following assuming a 10% interest rate:
   1. PW
   2. EAW
   3. FW
   4. Discounted payback period (year at which the sum of or cumulative PW of cash flows in years 1 through N = initial investment)
   5. Benefit / Cost Ratio
   6. Find Internal rate of return of the cash flows

Year	Cash Flow
0	-4000
1	250
2	500
3	750
4	1000
5	1250
6	1500

Answer 1

1. Present Worth (PW)=Future Value/(1+i)^n

Therefore Present Worth=

1(-4000)+250(0.909)+500(0.826)+750(0.751)+1000(0.683)+1250(0.621)+1500(0.564)

=-4000+227.25+413+563.25+683+776.25+846=-$904.25

2. EAW=rate of interest(Net present value)/1-(1+r)^-n

=$ 904.25 (0.10)/{1-(1+0.10)^-4

=$904.25(0.10)/0.31698654

=285.264

3. FutureWorth=Present value(1+rate of interest)^n

(4000)(1)+227.25(1.10)+413(1.10)^2+563.25(1.10)^3+683(1.10)^4+776.25(1.10)^5+846(1.10)^6

=-4000+249.975+499.73+749.686+999.980+1250.158+1498.741

=$1248.27

4. Discounted payback period= Beyond 6 years

Year	Cash Flow	Cummulative value of Present value of Cash flow @10%
0	(-4000)	-4000
1	250	227.25=227.25
2	500	227.25+413=640.25
3	750	640.25+563.25=1203.5
4	1000	1203.5+683=1886.5
5	1250	1886.5+776.25=2662.75
6`	1500	2662.75+846=3508.75

Discounted payback is approximately beyond 6 years