Part One These are the forecasts of revenues over the lifetime of a project. Ass
ID: 2709596 • Letter: P
Question
Part One
These are the forecasts of revenues over the lifetime of a project. Assume all cash flows at the end of the year.
Yearly expenses from year 1 to year 3: $30M
Yearly revenues from year 1 to year 3: $0
Yearly expenses from year 4 to year 10: $55M
Yearly expected evenues from year 4 to year 10: $105M
The discount rate for the firm is 7.9% for all cash flows (net cash flows from projects, recovered NWC)
In the first part of questions, you are asked to only calculate the present value of the discounted costs and revenues. What is this value?
Part Two
Annunity of $50M a year for 7 years, the first cash flow which will occur at the end of the 4th year, and the last one which will occur at the end of the 10th year. Now position yourself at the end of year 3. You should be able to use the annuity formula for the 7 cash flows which will occur from the end of year 4 to the end of year 10. However, you will have the value at the end of year 3 by using the annuity formula. You will have use discounting again to find the present value, that is today.
Once you have calculated the above, your answer would be Part 1- Part 2 = Discounted net cash flows from year 4 to year 10 -discounted costs from year 1 to year 3. (Give your answer in millions)
Explanation / Answer
The present value is
Cashflow at year 0 + Cashflow at year 1/ (1+r) + cashflow at year 2/(1+r)^2 + cashflow at year 3/ (1+r)^3 + ..................
So , cashflow from year 1 to 3
Inflow = 0, outflow = 30Mn
So, net is -30 Mn
From year 4 to 10
Inflow = 105 mn, Outflow = 55 mn
Net = 105-55 = 50
So, -30/(1.079) -30/(1.079^2) -30 /(1.079)^3 + 50/(1.079)^4 + 50/(1.079)^5 + 50/(1.079)^6 +50/(1.079)^7 +50/(1.079)^8 +50/(1.079)^9 + 50/(1.079)^10
=
130.48
The answer is 130.48 Mn
Year Cashflow Present Value @ 7.9% 1 -30 -27.80 2 -30 -25.77 3 -30 -23.88 4 50 36.89 5 50 34.19 6 50 31.68 7 50 29.36 8 50 27.21 9 50 25.22 10 50 23.38 130.48 Year Cashflow Present Value @ 7.9% 1 -30 -27.80 2 -30 -25.77 3 -30 -23.88 4 50 36.89 5 50 34.19 6 50 31.68 7 50 29.36 8 50 27.21 9 50 25.22 10 50 23.38 Total130.48
The answer is 130.48 Mn