3.1 Net Present ValueYour firm is trying to decide whether or not to invest in a new projectopportunity based on the following information. The initial cashoutlay will total $250,000 over two years. The firm expects to invest$200,000 immediately and the final $50,000 in one years time. Thecompany predicts that the project will generate a stream of earningsof $50,000, $100,000, $200,000, and $75,000 per year, respectively,starting in Year 2. The required rate of return is 12%, and the expectedrate of inflation over the life of the project is forecast to remainsteady at 3%. Should you invest in this project?SOLUTIONIn order to answer this question, we need to organize the followingdata in the form of a table (see Table 3.11):Total outflow = $250,000Total inflow = $400,000Required rate of return (r) = 12%Inflation rate (p) = 3%Discount factor = 1/(1 + r + p)tThe result is Table 3.11.Because the discounted revenue stream is positive ($11,725),the project would be a good investment and should be pursued.3.2 Discounted PaybackYour firm has the opportunity to invest $75,000 in a new projectopportunity but due to cash flow concerns, your boss wants toknow when you can pay back the original investment. Using thediscounted payback method, you determine that the project shouldgenerate inflows of $30,000, $30,000, $25,000, $20,000, and $20,000respectively for an expected five years after completion of the project.Your firms required rate of return is 10%. Calculate how long itshould take to pay back the initial project investment.Solved ProblemsTABLE 3.11 Discounted Cash Flows and NPV