Question

11. You are considering a project with a ring a project with an initial cash outlay of 60.000 Lira and expected free cash flows of 20.000 Lira at the end of each year for ura at the end of each year for 5 years. The required rate of return for this project is 12% A. Calculate the project's payback period. (2p) B. Calculate the project's NPV. (4p) C. Calculate the project's PI. (10) D. State the meaning of IRR and comment whether you expect it to be above or below the (3p) project's required rate of return.(that is 12%)

Answer 1

A]

Payback period is the time taken for the cumulative cash flows to equal zero

Payback period = 3

2 А в с Cumulative 1 Year Cash Flow Cash Flow 0 (60,000) (60,000) 1 20,000 (40,000) 2 20,000 (20,000) 3 20,000 4 20,000 20,000 5 20,000 40,000 7

А в 1 Year 2 0 31 42 53 Cash Flow -60000 20000 20000 20000 20000 20000 Cumulative Cash Flow =B2 =C2+B3 =C3+B4 =C4+B5 =C5+B6 =C6+B7 75

B]

NPV is calculated using NPV function in Excel.

NPV is 12,096

fx =NPV(12%,B3:B7)+B2 D E F B8 AAB C Cumulative 1 Year Cash Flow Cash Flow (60,000) (60,000) 1 20,000 (40,000) (20,000) 3 20,000 4 20,000 20,000 20,000 40,000 8 NPV 12,096

C]

PI = (NPV + initial investment) / initial investment

PI = (12,096 + 60,000) / 60,000

PI = 1.20

D]

IRR is the required rate of return at which the NPV is zero.

The IRR is expected to be above 12% because the NPV is positive.