Question

Suppose that you undertook an investment project with the following estimated cash flows. At the end of year 3, you have received an offer to buy the project from another firm, what minimum price would be the fair price to ask? Here your required return on investment is 15% EEB Click the icon to view the estimated cash flows Click the icon to view the interest factors for discrete compounding when 15% per year The minimum price l bethousand. (Round to one decimal place.) More Info ingle Payment ual Payment Serie Compound Present Compound Sinkin Amount Factor (F/P, İN) 1.1500 1.3225 1.5209 1.7490 2.0114 Worth Factor (PF, i, N) 0.8696 0.7561 0.6575 0.5718 0.4972 Amount Factor (FIA, i, N) 1.0000 2.1500 3.4725 4.9934 6.7424 Fund Factor (AF, i, N) 1.0000 0.4651 0.2880 0.2003 0.1483 Present Worth Factor (PIA, i, N) 0.8696 1.6257 2.2832 2.8550 3.3522 Capital Recovery Factor (AP, i, N) 1.1500 0.6151 0.4380 - $152,000 42,400 53,400 52,500 62,500 33,000 4 0.3503 0.2983 4 Print Done 8.7537 11.0668 13.7268 16.7858 20.3037 3.7845 4.1604 2.3131 2.6600 3.0590 3.5179 4.0456 0.4323 0.3759 0.3269 0.2843 0.2472 0.2642 0.1142 0.0904 0.0729 0.0596 0.0493 0.2404 0.2229 4.4873 4.7716 5.0188 0.2096 0.1993 10 Problem 5-26 (book/static) Question Help * Suppose that you undertook an investment praject with the following estimated cash flows. At the end of year 3, you have received an offer to buy the project from another firm, what minimum price would be the fair pnce to ask? Here your required return on investment is 15%. 囲Click the icon to view the estimated cash flows Click the icon to view the interest factors for discrete compounding when 15% per year The minimum price will be $□ thousand. (Round to one decimal place.)

Answer 1

ANSWER
Investment projects produce durable assets of repetitive use. Initially a lump sum money is invested. Then from the services received from capital asset, some cash inflows are received in future at periodic intervals. On expiry of the life of asset, it is sold, and scrap value is realized. Decision is taken here on the acceptability of such projects. Different methods are available. One method is net present worth. Following steps are adopted in this method. Step 1: Collect basic data like cash flows from the project during its life time. Step 2: Since cash flows are received at different times in a year, you have to calculate their equivalent value at time zero. It is done by multiplying annual cash flows and discounting factor of the year Here discounting factor is present value of dollar one receivable after n years. Formula of discounting is In the expression, T is discounting rate. It is minimum acceptable rate of return that project must earn. It is cut off rate. step 3: Add annual present value of periodic cash flows. It will give total present worth of the project. Step 4: From total present worth, deduct first cost incurred. Balance is net present worth. Step 5: If net present worth is positive, then project is accepted.

In this problem, a project has started three years back. Total life of the project is five years. So only two years is left. Cash inflow will generate only for fourth and fifth year. If investor wants to sell this project to a new buyer, then he will recover at least present value of expected future cash flows. Minimum required rate of return is 15%. It will be recovered from the project. So calculate price of selling the project. Cash inflows of year 4 will be $62,500. In 5th year cash inflow expected is $33,000. So minimum price is- Discounting- 1+r $62,500 $33,000 (1+0.15) +0.15) - $54,347.57 +$24,952.74 $79,300.57 The price amounts to $79,300.57

So minimum price of selling project now is $79,300. Any price over and above this amount, will give higher return.