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Year Cash flow () 0 - Investment -? 1 150,000 2 150,000 3 4 150,000 ? Some years ago X AG paid 15000 for a

Year

Cash flow ()

0 - Investment

-?

1

150,000

2

150,000

3

4

150,000

?

Some years ago X AG paid 15000 for a vacant lot with planning permission. The plot could easily be sold today for 10 times that amount. X AG has however a project in mind that would occupy the plot and require investment of 200,000 but generate positive cash flows of 150,000 for the next 4 years. X AG will be able to sell the plot for 100000 at the conclusion of the project.

  1. Calculate the relevant cash flows for years 1 through 4 and the appropriate initial investment value.

  2. For the cash flows calculated above, suppose the firm uses the NPV decision rule. At a required return of 7 per cent, should the firm accept this project?

  3. What if the required return was 15 percent?

  4. What is the Cash Payback Period ? Should the firm accept if projects are required to payback within 2 years?

  5. Calculate the PI ratio at 7 and 15 percent

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