Question

2. A certain project has a duration of 7 years with the Outbound cash flow reported in Table 1. Two alternative terms of payment are reported in Table 2 and 3. The currency is Millions of Dollars. The discount rate (or WACC) is 10% TABLE 1 Year Outbound cash flow 0 10 1 20 2 20 3 50 4 70 5 50 6 20 7 10 TABLE 2-CASE A Year Inbound cash flow 0 20 4 30 5 30 6 30 7 30 1 2 3 30 40 50 TABLE 3 - CASE B Year Inbound cash flow 0 10 1 10 2 10 3 10 4 10 5 30 6 200 7 200 Tasks (a) Show the graph of the project balance for each year for both cases [10 marks] (b) Calculate the maximum exposition for both cases [5 marks] (c) Calculate the Total exposition for both cases [5 marks] (d) Calculate the Net Present Value for both cases [5 marks] (e) Compare and contrast the findings for Case A and Case B focusing the discussion on the trade of project risk against project return [8 marks]

Answer 1

CASE 1 CASE 2 Net Cash flow Net Cash flow 40 250 200 20 150 100 Total 3 50 -20 -40 2. 5. Total -50 -60 -100 I Net Cash flow I Net Cash flow

CASE 1 CASE 2 Inbound Out Inbound Out Cash Cash bound Net Cash bound Net Cash cash flow flow flow cash flow flow Year flow Year 10 20 10 10 -10 30 20 -20 20 10 20 -20 2 20 2. 40 20 -40 50 50 50 3 10 -40 -60 4 30 70 10 70 -20 -20 30 50 50 30 30 10 200 6| 180 20 20 20 10 30 10 200 190 Total Total 450 250 200 260 10 250 Maximum Exposition Maximum Exposition 20 190 3.

(c) CASE 1 CASE 2 Inbound lout Inbound Out Cash bound Cash bound Net Cash Net Cash flow flow cash flow flow cash flow flow Year Year 20 10 10 10 -10 30 10 20 20 -20 2 40 20 20 20 -20 50 50 10 50 -40 4 -40 30 70 10 70 -60 30 50 -20 30 50 -20 10 30 20 6. 200 20 180 30 10 20 10 200 190 Total Total 10 260 250 450 250 200 Total Exposition Total Exposition 10 200 918 918

I( d) CASE 1 CASE 2 Inbound lOut Discount Discount Inbound Discount lOut Net Cash ing Net Cash Discounti ed Cah Cash Cash bound ed Cah bound cash flow flow cash flow flow flow ng Factor Flow Year flow Flow Year Factor 20 10 -10 10 10 10 -10 30 20 10 0.909091 9.090909 20 0.826446 16.52893 -20 0.909091 -18.1818 -20 0.826446 -16.5289 20 2 40 20 20 -40 0.751315 0 0.751315 -30.0526 -40.9808 50 50 50 10 -40| 0.683013 -27.3205 -60 0.683013 30 4 70 4 70 10 -20 0.620921 -12.4184 -20 0.620921 -12.4184 30 50 30 50 10 0.564474 5.644739 20 0.513158 10.26316 20 180 0.564474 101.6053 190 0.513158 97.50004 б 30 20 200 30 10 10 200 Total 260 250 10 5.868419 11.78877 250 70.94278 Total 200 450 NPV 11.78877 NPV 70.94278 71 891818181818 71

(e) As Compared to Case A NPV is more in Case B.So long term Case B is better than case A