Corporate Finance

1. Solution
Year Cash flow Present Value Interest Present Value or
Factor Discounted Cash
flow
0 (105 000) 1.0000 (105 000)
1 25 000 0.8902 22 255
2 35 000 0.7925 27 738
3 35 000 0.7055 24 693
4 40 000 0.6281 25 124
5 5 000 0.5591 2 796

1
The Present Value Interest Factor Formula =
(1+𝑟)𝑛
Given that r = 12.33% and n takes values from 0 to 5

Calculation of the Discounted Payback Period

Year Discounted Cash flow Cumulative Discounted Cash

flow
0 (105 000) (105 000)
1 22 255 (82 745)
2 27 738 (55 007)
3 24 693 (30 314)
4 25 124 (5 190)
5 2 796 (2 394)

The project should not be accepted at a discount rate of 12.33% because it cannot recover
the investment cost during the 5-year period.

Question 2

Year Cash flow

0 (500 000)
1 100 000
2 100 000
3 100 000
4 100 000
5 100 000
6 100 000
Net Present Value = Annuity Amount × Present Value Interest Factor Annuity (14.65%, 6years)
– Investment Cost
1−(1+𝑟)−𝑛
Present Value of Annuity = 𝐴[ ]
𝑟

1−(1+0.1465)−6
Present Value of Annuity = 100 000[ ]
0.1465

Present Value of Annuity = 100 000 ×3.8204

Present Value of Annuity = 382 043

Net Present Value = 382 043 – 500 000

Net Present Value = (117 957)

Nile should not undertake this project because it yields a negative net present value.

Question 3

To rank the projects based on the profitability Index

𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐹𝑢𝑡𝑢𝑟𝑒 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤𝑠
Profitability Index =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

269 000
Project A =
185 000

= 1.4541
260 000
Project B =
197 000

= 1.3198
137 000
Project C =
81 000

= 1.6914
299 000
Project D =
210 000

= 1.4238
352 000
Project E =
282 000

= 1.2482
 Project Profitability Index Rank Investment Cost
A 2 185 000
B 4 197 000
C 1 81 000
D 3 210 000
E 5 Funds Insufficient to
implement this project

The Firm will implement projects C, A, D, and E in that order, and project E will not be
implemented since the budget of 700 000 would not be sufficient to undertake all projects.