Question a four year financial project has net cash flows of...

QUESTION A four-year financial project has net cash flows of $20,000; $25,000; $30,000 and $50,000 in the next four (4) years. It will cost $75,000 to implement the project, and the required rate of return is 0.2. Ignoring the time value of money, determine the payback period and the average rate of return for this project. Conduct a discounted cash flow calculation to determine the NPV & recommend whether this is a feasible project or otherwise. What would happen if the inflation rate was expected to be at 4% yearly for the next four years?

Transcript

00:02 Here are the calculations for the payback period, average rate of return, npv and inflation impact on the project.

00:10 So payback period equals to, what is the formula of payback period? the payback period is the amount of time it takes to recover the initial investment.

00:30 So in this case, the initial investment is $75 ,000.

00:35 The net cash flow are $20 ,000, 25 ,000, 30 ,000 and 50 ,000.

00:40 This means that the payback period is initial investment divided by 20 ,000, initial investment $75 ,000, net cash flows are $20 ,000, $25 ,000, $30 ,000 and $50 ,000.

01:39 So this means that the payback period is $75 ,000.

01:55 Divided by $20 ,000 plus $75 ,000 divided by $25 ,000 plus $75 ,000 divided by $30 ,000, which is equals to three years plus three years plus 2 .5 years, which is equals to 8 .5 years.

02:39 Average rate of return is the return on investment over the life of the project.

03:00 So in this case, the return on the investment is $20 ,000, 25 ,000, 30 ,000, 50 ,000 minus $75 ,000 divided by $75 ,000.

03:11 So average rate of return equals to $20 ,000 plus $25 ,000 plus $30 ,000 plus $50 ,000 minus $75 ,000 divided by $75 ,000, which is equals to 0 .733 equals to 73 .3%.

03:45 Now we will calculate the discounted cash flow.

03:48 Discounted cash flow dcf is used to determine the net present value of the project.

03:55 So npv is difference between the present value of the project's cash inflows and the present value at the present value of cash outflows.

04:05 In this case, the discount rate is 0 .2 equals to 20%...

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