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18 March, 16:48

A recent project nominated for consideration at your company has a four-year cash flow of $20,000; $25,000; $30,000; and $50,000. The cost of the project is $75,000.1. If the required rate of return is 20%, conduct a discounted cash flow calculation to determine the NPV. 2. What is the benefit-cost ratio for the project3. Assuming the required rate of return remains 20%, what would the NPV of the above project be if the inflation rate was expected to be 4% in each of the next four years?

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  1. 18 March, 16:57
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    1. $501.54

    2. 1.01

    3. - $5,728.56

    Explanation:

    The computations are shown below:

    1. For net present value

    Year Cash flow Discount factor @20% Present value

    0 $75,000 1 $75,000

    1 $20,000 0.8333333333 $16,666.67

    2 $25,000 0.6944444444 $17,361.11

    3 $30,000 0.5787037037 $17,361.11

    4 $50,000 0.4822530864 $24,112.65

    Total of cash inflows $75,501.54

    NPV $501.54

    The discount factor should be computed below

    = 1 : (1 + rate) ^ years

    2. The benefit cost ratio would be

    = Total Present value : Initial investment

    = $75,501.54 : $75,000

    = 1.01

    3. 1. For net present value

    Year Cash flow Discount factor @20% Present value

    0 $75,000 1 $75,000

    1 $20,000 0.8064516129 $16,129.03

    2 $25,000 0.650364204 $16,259.11

    3 $30,000 0.5244872613 $15,734.62

    4 $50,000 0.4229735978 $21,148.68

    Total of cash inflows $69,271.44

    NPV - $5,728.56

    The discount factor should be computed below

    = 1 : (1 + rate) ^ years
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