Question

Please I want clear workings and formula used to arrive at the answer and detailed explanation for better understanding

A recent project nominated for consideration at your company has a four-year cash flow of $20,000; $25,000; $30,000; and $50,000. The cost of the project is $75,000.

a. If the required rate of return is 20%, conduct a discounted cash flow calculation to determine the NPV.

b. What is the benefit-cost ratio for the project?

c. What would the NPV of the above project be if the inflation rate was expected to be 4% in each of the next four years?

Answer 1

Part A

	Investment	Year 1	Year 2	Year 3	Year 4
Cash flow	(75000)	20000	25000	30000	50000
PV@ 20%	1.00000	0.83333	0.69444	0.57870	0.48225
Present value	-75000	16667	17361	17361	24113
NPV	$502

Part B

Benefit-cost ratio = PV of benefit expected from the project / PV of the cost of the project = 75502/75000 = 1.01

Part C

Real discount rate = ((1.20/1.04)-1) = 15.38%

	Investment	Year 1	Year 2	Year 3	Year 4
Cash flow	(75000)	20000	25000	30000	50000
PV@ 15.38%	1.00000	0.86670	0.75117	0.65104	0.56426
Present value	-75000	17334	18779	19531	28213
NPV	$8857