Question
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.
-
Calculate the relevant cash flows for years 1 through 4 and the appropriate initial investment value.
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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?
-
What if the required return was 15 percent?
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What is the Cash Payback Period ? Should the firm accept if projects are required to payback within 2 years?
-
Calculate the PI ratio at 7 and 15 percent
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