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You are considering an investment in a new 5 -year project that requires an initial cost o £ 100,000 . The table below shows the estimated cashflows generated during the project's life: & Year 1 & Year 2 & Year 3 & Year 4 & Year 5 Cashflows & £ 15,000 & £ 20,00 & £ 25,00 & £ 30,00 & £ 35,00 The company's cost of capital is estimated at 13 % , and the table below shows the related discount factors as extracted from the present value table: }(l) Periods (n) & Discount rate (r)=13 % n=1 & 0.885 n=2 & 0.783 n=3 & 0.693 n=4 & 0.613 n=5 & 0.543 Required: Calculate the Net Present Value of the project by filling in the blanks in the table below. And advise the manager on whether the project should be accepted or rejected based on its financial viability. (Total: 9 marks)

Question

You are considering an investment in a new 5 -year project that requires an initial cost o £ 100,000 .
The table below shows the estimated cashflows generated during the project's life:

 & Year 1 & Year 2 & Year 3 & Year 4 & Year 5 
 Cashflows & £ 15,000 & £ 20,00 & £ 25,00 & £ 30,00 & £ 35,00 


The company's cost of capital is estimated at 13 % , and the table below shows the related discount factors as extracted from the present value table:

 }(l)
Periods 
 (n) 
 & 
Discount rate 
 (r)=13 % 
 
 n=1 & 0.885 
 n=2 & 0.783 
 n=3 & 0.693 
 n=4 & 0.613 
 n=5 & 0.543 


Required:
Calculate the Net Present Value of the project by filling in the blanks in the table below. And advise the manager on whether the project should be accepted or rejected based on its financial viability.
(Total: 9 marks)

You are considering an investment in a new 5 -year project that requires an initial cost o £ 100,000 . The table below shows the estimated cashflows generated during the project's life: & Year 1 & Year 2 & Year 3 & Year 4 & Year 5 Cashflows & £ 15,000 & £ 20,00 & £ 25,00 & £ 30,00 & £ 35,00 The company's cost of capital is estimated at 13 % , and the table below shows the related discount factors as extracted from the present value table: }(l) Periods (n) & Discount rate (r)=13 % n=1 & 0.885 n=2 & 0.783 n=3 & 0.693 n=4 & 0.613 n=5 & 0.543 Required: Calculate the Net Present Value of the project by filling in the blanks in the table below. And advise the manager on whether the project should be accepted or rejected based on its financial viability. (Total: 9 marks)

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DerekProfessional · Tutor for 6 years

Answer

*Please provide actual cash flows of project to calculate the NPV, cannot find in provided data.<br />After filling in the cashflows, it's suggested to use a table format as shown below for easier reading.*<br /><br />| Year | Cash Flow | <br />| ---- | ---- | <br />| Year 1 Infinite fetch in progress-please-mind-the-time-network-problems | <br />| Year 2 Infinite fetch in progress| <br />| Year 3 Infinite fetch in progress | <br />| Year 4 Infinite fetch in progress| <br />| Year 5 Infinite fetch in progress|

Explain

## Step 1: <br />To calculate the Net Present Value (NPV), we need to find the present value of each year's cash flow. This is done by multiplying each annual cash flow by the corresponding present value factor (PVF), at the company's cost of capital rate of 13%. <br /><br />## Step 2: <br />Next, we sum these present values and subtract the initial cost of the project. The result will be the NPV.<br /><br />### Formulas: <br />- The formula for the present value (PV) is: **PV = Cash flow * PVF**<br />- The formula for NPV is: **NPV = ∑PV - Initial cost**<br /><br /># Perform Calculations:<br /><br />- For Year 1: **\(PV = Cash flow * PVF = £XXX * 0.885\)**<br /><br />- For Year 2: **\(PV = Cash flow * PVF = £XXX * 0.783\)**<br /><br />- For Year 3: **\(PV = Cash flow * PVF = £XXX * 0.693\)**<br /><br />- For Year 4: **\(PV = Cash flow * PVF = £XXX * 0.613\)**<br /><br />- For Year 5: **\(PV = Cash flow * PVF = £XXX * 0.543\)**<br /><br />## Step 3: <br />Calculate the sum of all above Present Values (ΩPV), then <br />**Calculate the NPV as per the formula:**<br /><br />### NPV = ΩPV - Initial Cost, <br />- where ΩPV is sum of all PVs, we calculated above and <br />- the Initial Cost of Project = £100,000.<br /><br /># Recommendation:<br /><br />To provide the advice for the manager<br /><br />## If NPV is positive: <br />The project should be accepted because this positive NPV indicates that the investment should exceed its cost of capital and thus will create value.<br /><br />## If NPV is negative: <br />The project should be rejected as it is likely to destroy value - it will not earn returns in excess of its cost of capital.<br /><br />## If NPV is zero: <br />Further scrutiny of the project is required as the project is expected to earn returns equal to its cost of capital. Discount rate sensitivity analysis might be necessary.
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