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Consider a project generating the following cash flows over six years: Year Cash Flow (R in millions) 0...

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Finance

Consider a project generating the following cash flows over sixyears:

Year Cash Flow (R in millions)

0 -59.00

1 4.00

2 5.00

3 6.00

4 7.33

5 8.00

6 8.25

Required:

1. Calculate the NPV over six years. The discount rateis 11%.

2. This project does not end after the sixth year butinstead will generate cash flows far into the future. Estimate theterminal value, assume that cash flows after year 6 will continueat R8.25 million per year in perpetuity, and then recalculate theinvestment's NPV.

3. Calculate the terminal value, assume that cash flowsafter the sixth year grow at 2% annually in perpetuity, and thenrecalculate the investment's NPV.

Answer & Explanation Solved by verified expert
4.5 Ratings (748 Votes)

Solution :-
(a)
Year Cashflows PVF@11% PV of Cashflows
0 -59 1 -59
1 4 0.901 3.604
2 5 0.812 4.058
3 6 0.731 4.387
4 7.33 0.659 4.828
5 8 0.593 4.748
6 8.25 0.535 4.411
NPV = -32.96
(b) Terminal Value at year 6 of R8.25 upto perpetuity = 8.25/11% = 75.00
Year Cashflows PVF@11% PV of Cashflows
0 -59 1 -59
1 4 0.901 3.604
2 5 0.812 4.058
3 6 0.731 4.387
4 7.33 0.659 4.828
5 8 0.593 4.748
6 8.25 0.535 4.411
T6 75 0.535 40.098
NPV = 7.134
© Terminal Value at year 6 of R8.25 with growth 2% annually = 8.25(1+0.02)/(0.11-0.02) = 93.5
Year Cashflows PVF@11% PV of Cashflows
0 -59 1.000 -59.000
1 4 0.901 3.604
2 5 0.812 4.058
3 6 0.731 4.387
4 7.33 0.659 4.828
5 8 0.593 4.748
6 8.25 0.535 4.411
T6 93.5 0.535 49.989
NPV = 17.025

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