A project requires an initial investment of Rs.5, 00,000. It is estimated to have a life of 6 years. The estimated net cash flows are as under: Year Net Cash Flow (Rs.) 1 60,000 2 80,000 3 1, 10,000 4 1, 20,000 5 1, 30,000 6 1, 00,000 Cost of capital is 10%. Calculate: a. Payback Period b. Net Present Value c. IRR of the project. Assume that the standard payback period is 4 years. Should the project be accepted as per each of the above measures? Why? [Discount factors at 10% are 0.909, 0.826, 0.751, 0.683, 0.621, 0.564 for 1 to 6 years.]
Answers
Answer:
Explanation:Assignment -2 (Solutions)
The following should be used for questions 1 through 3.
A project manager is relegated to a venture ahead of schedule in the venture lifecycle. Something that
must be done is to do a justification for the project. Since very little information is known about the
project, the estimates are considered to be rough estimates. The accompanying table is the project
manager’s gauge of the income that will occur throughout the following five years:
End of Year Cash Flow In Cash Flow Out
1 0 500,000
2 300,000 90,000
3 400,000 100,000
4 100,000 175,000
5 50,000 35,000
1. What is the payback period for this project?
A. One year
B. Two years
C. Three years
D. Four years
(Ans.: C)
Explanation:
End of Year Cash Flow In Cash Flow Out Net (Yearly) Net (overall)
1 0 500,000 (500,000) (500,000)
2 300,000 90,000 210,000 (290,000)
3 400,000 100,000 300,000 10,000
4 100,000 175,000 (75,000) (65,000)
5 50,000 35,000 15,000 (50,000)
2. What is the net cash flow at the end of five years?
A. $50,000
B. -$50,000
C. $850,000
D. $100,000
(Ans.: B)
Explanation: -$50,000 (Last cell in 5th column)
3. If the net present value for each of the cash flows were calculated at a 10% interest rate, the
net present value cash flow at the end of five years would be:
A. Greater than the total cash flow without the net present value applied
B. Less than the total cash flow without the net present value applied
C. The same as the total cash flow without the net present value applied
D. Unable to be calculated with the information supplied
(Ans.: B)
Explanation:
= �− 500,000
(1 + 0.1)0� + �− 290,000
(1 + 0.1)1� + � 10,000
(1 + 0.1)2� + � −65,000
(1 + 0.1)3� + � −50,000
(1 + 0.1)4�
= −838,358
ℎ ℎ = −500,000 − 290,000 + 10,000 − 65,000 − 50,000 = −895,000
4. A project manager is dealing with a venture. The first extension standard of the venture was
planned at $100,000. Since work on the venture began there have been seventeen approved
and affirmed changes to the venture. The progressions have an estimation of $17,000 and the
cost of exploring them before their endorsement was $2,500. What is the present spending
plan for the venture?
A. $100,000
B. $114,500
C. $117,000
D. $119,500
(Ans.: D)
Explanation:
Initial Cost: $100,000
Progressions: $17,000
Cost of Exploring: $2500
Total = $119,500
5. A project manager is dealing with a venture that has achieved the end of planning phase. The
work scope has been consented to and conclusive cost gauges have been finished for the
venture. The aggregate assessed cost of the venture is $100,000. It is sensible to expect that
the venture won't cost over which of the following value?
A. $100,000
B. $110,000
C. $125,000
D. $175,000