Question

2. Consider an existing project with an annual cash generation of $8000 expected to last 15 years. If an additional single investment of $10,000 is made, the cash flow will be accelerated to $12,000 per year but would last only 10 years, since no new cash was generated.

a) Generate a cash flow table for this project

b) Analyse the profitability of this accelerated project using discounted cash flow rate of return.

(No discount rate was given, I guess he wants us to assume one, maybe 10% or something like that)

Answer 1

A29 fic ABC H I J K L Year (A) Existing cash flow New cash flow Incremental cash flow Discount factor@10% -10,000.00 -10,000.00 8,000.00 12,000.00 4,000.00 0.909090909 8,000.00 12,000.00 4,000.00 0.826446281 8,000.00 12,000.00 4,000.00 0.751314801 8,000.00 12,000.00 4,000.00 0.683013455 8,000.00 12,000.00 4,000.00 0.620921323 8,000.00 12,000.00 4,000.00 0.56447393 8,000.00 12,000.00 4,000.00 0.513158118 8,000.00 12,000.00 4,000.00 0.46650738 8,000.00 12,000.00 4,000.00 0.424097618 8,000.00 12,000.00 4,000.00 0.385543289 8,000.00 -8,000.00 0.350493899 8,000.00 -8,000.00 0.318630818 8,000.00 -8,000.00 0.28966438 8,000.00 -8,000.00 0.263331254 8,000.00 -8,000.00 0.239392049 Profitability (B) Present Value -10,000.00 3,636.36 3,305.79 3,005.26 2,732.05 2,483.69 2,257.90 2,052.63 1,866.03 1,696.39 1,542.17 -2,803.95 -2,549.05 -2,317.32 -2,106.65 -1,915.14 2,886.17 Earlier the cash flow for the company was $ 8000 per year for the 15 years. After the introduction of the new project the cash flow will be increased to $12000 per year but last for only 10 years so after 10 years the cash flow would be 0. So to accept the project we will need to find out the incremental cash flow (New cash flow - Existing cash flow) and acceptability of the project will be the net present value of the project. Profitability of the Project = Sum of Discounted cash flow (Present Value) - Initial Investment

A29 A B C D H (A) (B) Year Existing cash flow 8000 8000 8000 8000 8000 8000 8000 8000 8000 8000 8000 8000 8000 8000 8000 N ew cash flow -10000 12000 12000 12000 12000 12000 12000 12000 12000 Incremental cash flow =D4-C4 =D5-C5 =D6-C6 =D7-C7 =D8-C8 =D9-09 =D10-C10 =D11-C11 =D12-C12 =D13-C13 =D14-C14 =D15-C15 =D16-C16 =D17-C17 =D18-C18 =D19-C19 Discount factor @10% =1/1.1^B4 |=1/1.1^B5 =1/1.14B6 =1/1.1^B7 =1/1.1^B8 =1/1.1^B9 =1/1.1^B10 =1/1.1^B11 =1/1.1^B12 =1/1.1^B13 =1/1.1^B14 =1/1.1^B15 =1/1.1^B16 =1/1.1^B17 =1/1.1^B18 =1/1.1^B19 Profitability Present Value =E4*F4 =E5*F5 =E6*F6 =E7*F7 =E8*F8 =E9*F9 =E10*F10 =E11*F11 =E12*F12 =E13*F13 =E14*F14 =E15*F15 =E16*F16 =E17*F17 =E18*F18 =E19*F19 =SUM(G4:619) 12000 12000 Earlier the cash flow for the company was $ 8000 per year for the 15 years. After the introduction of the new project the cash flow will be increased to $ 12000 per year but last for only 10 years so after 10 years the cash flow would be 0. So to accept the project we will need to find out the incremental cash flow (New cash flow - Existing cash flow) and acceptability of the project will be the net present value of the project. Profitability of the Project = Sum of Discounted cash flow (Present Value) - Initial Investment