Question

JR inc. would like your help in analyzing a new venture. The lead manager thinks that the project will create a net cash inflow of $100,000 next year and this net cash flow will grow at 4%/year indefinitely. The initial cost of the project will be $1,000,000 and the required rate of return is ten percent.

Calculate NPV, the PI, and the Discounted Payback Period.

Answer 1

rate positively ..

	given that -
	Initial investment =		1000000
	Net cash flow next year =		100000
	Growth rate =		4%
	Required rate =		10%
	Therefore NPV = Expected cash flow next year/(required rate - growth rate)
			100000/(10%-4%)-1000000
			666,667
	NPV =		666,667
	PI = (NPV+Initial investment)/Initial investment
			(666667+1000000)/1000000
			1.67
	Computation of discounted payback period
		i	ii
	year	Cash flow	PVIF @ 10%	Discounted cash flow	Cumulative cash flow
	0	-1000000	1	(1,000,000)	(1,000,000)
	1	100000	0.909090909	90,909	(909,091)
	2	104000	0.826446281	85,950	(823,140)
	3	108160	0.751314801	81,262	(741,878)
	4	112486.4	0.683013455	76,830	(665,049)
	5	116985.9	0.620921323	72,639	(592,410)
	6	121665.3	0.56447393	68,677	(523,733)
	7	126531.9	0.513158118	64,931	(458,802)
	8	131593.2	0.46650738	61,389	(397,413)
	9	136856.9	0.424097618	58,041	(339,372)
	10	142331.2	0.385543289	54,875	(284,497)
	11	148024.4	0.350493899	51,882	(232,615)
	12	153945.4	0.318630818	49,052	(183,564)
	13	160103.2	0.28966438	46,376	(137,187)
	14	166507.4	0.263331254	43,847	(93,341)
	15	173167.6	0.239392049	41,455	(51,886)
	16	180094.4	0.217629136	39,194	(12,692)
	17	187298.1	0.197844669	37,056	24,364
	18	194790	0.17985879	35,035	59,398
	19	202581.7	0.163507991	33,124	92,522
	Therefore we can see that cumulative cash flow is postiive at year 17th .
	Discounted payback period =		16+12692/37056		16.34	year