Question 21

a)PBP=Cash outflow/cash inflow=52,125/12,000=4.34 years

Present value of cash inflow of year 1 = 12,000/ (1.12)

PV of inflow of year 2 = 12,000/ (1.12^2)..... Similarly PV of inflow of 8th year = 12,000/ (1.12^8)

Adding PV of all inflows of 8 years we get the amount as = $59,611.68

NPV = PV of inflows - PV of outflows = 59,611.68 - 52,125 = $7,486.68

Payback period: values of PV of inflows =

PV of inflow Year

10,714.29 1

9,566.33 2

8,541.36 3

7,626.22 4

6,809.12 5

6,079.57 6

5,428.19 7

4,846.60 8

Amount recovered in 4 years = 4 * $12,000 = $48,000

Amount remaining = $52,125 - $48,000 = $4125
Time required to recover $4125 = 4125/12,000 = 0.34375 years
Payback period = 4.34375 years

b) NPV = -$52,125 +$12,000/ (1+r) + $12,000/ (1+r)^2 .... +$12,000/(1+r)^8 = 0 =$7,486.68

NPV = 0 - $52,125 + $12,000/(1+r) + $12,000/(1+r)^2 .... +$12,000/(1+r)^8 = 0

IRR = 16%

c) The project should be accepted as it has Positive NPV and IRR and MIRR is greater
than cost of capital. Yes, the project is financially acceptable as the project has a
positive NPV and reasonable payback period. In addition, the IRR is greater than the
cost of capital (16% greater than 12%) making the project financially acceptable.

Question 22
a) Project's expected NPV = - 0.05 *$700,000 + - 0.2 *$250,000 + 0.5 *$120,000+
0.2* $200,000+0.05 *$300,000 =$30,000

Variance = (-700,000-30,000)^2 *.05 +(-250,000-30,000)^2*.2 +(120,000-

30,000)^2* .5 +(200,000-30,000)^2*.2 +(300,000-30,000)^2*.05= 55800000000

Hence Standard deviation of NPV = sqrt (var) = $236, 220.24

b) Base case analysis considers use of most likely values. Hence, use most likely
NPV. Base case should be most likely. Expected value is what you will get over
many outcomes. This will be only one outcome and is lower than the expected
NPV so most likely makes the most sense.