11201512-Tô Quang Hiếu

ASSIGNMENT 1
Problem 1: Two new Internet site projects are proposed to a young start-
up company. Project A will cost $250,000 to implement and
is expected to have annual net cash flows of $75,000. Project
B will cost $150,000 to implement and should generate
annual net cash flows of $52,000. The company is very
concerned about their cash flow. Using the payback period,
which project is better, from a cash flow standpoint?

Project A : Cost of $250,000 and Annual Cash Flow of $75,000.

Project B : Cost of $150,000 and Annual Cash Flow of $52,000.

Project Cost
Payback Period = Annual Casℎ Flow

250,000
So: Payback Period of Project A = 75,000 = 3.33

150,000
Payback Period of Project B = 52,000 = 2.88

Shorter payback period is better, So Project B is better for the young

start-up company.

Problem 2: Sean, a new graduate at a telecommunications firm, faces the

following problem on his first day at the firm: What is the
average rate of return for a project that costs $200,000 to
implement and has an average annual profit of $30,000?

A Project : Implement Cost of $200,000 and an Average Annual

Profit of $30,000

Average Annual Profit

Average Rate of Return = Implement Cost
30,000
So the Average Rate of Return of the Project = 200,000 = 0.15 =
15%
Problem 3: A four-year financial project has net cash flows of $20,000;
$25,000; $30,000; and $50,000 in the next four years. It will
cost $75,000 to implement the project. If the required rate of
return is 0.2, conduct a discounted cash flow calculation to
determine the NPV.

Initial Cash Investment ( A0 ) = -$75,000

Cash Flow year 1 = $20,000; Cash Flow year 2 = $25,000; Cash Flow
year 3 = $30,000; Cash Flow year 4 = $50,000
Required rate of return (r) = 0.2
n
Ft
NPV = A0 + ∑
t =1 ( 1+r )t
20,000 25,000 30,000 50,000
Project NPV = −75,000+ + + + =
( 1+0.2 )1 ( 1+0.2 )2 ( 1+0.2 )3 ( 1+0.2 )4
$501.54
Conclusion: The NPV is positive therefore the project can be
accepted

Problem 4: What would happen to the NPV of the above project if the
inflation rate was expected to be 4 percent in each of the next
four years?

Initial Cash Investment ( A0 ) = -$75,000

Cash Flow year 1 = $20,000; Cash Flow year 2 = $25,000; Cash Flow
year 3 = $30,000; Cash Flow year 4 = $50,000
Required rate of return (r) = 0.2
Inflation rate ( Pt ) = 0.04
n
Ft
NPV = A0 + ∑ t
( 1+r + Pt )
t =1

Project NPV =
20,000 25,000 30,000 50,000
−75,000+ + + + =-
( 1+0.2+0.04 ) ( 1+ 0.2+ 0.04 ) ( 1+0.2+0.04 ) ( 1+0.2+0.04 )4
1 2 3

$5,728.57
Conclusion: The NPV is negative therefore the project is rejected