Consider the following Year Cash Flow 0 5000 1 300 2 300 3

Consider the following: Year Cash Flow 0 -$5,000 1 $300 2 $300 3 ? 4 $300 5 $400 The required rate of return is 14%. Find the minimum amount you would have to receive as a cash flow in year 3 and still recommend the project. Answer to 2 decimals, for example 100.12.

Solution

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=300/1.14+300/1.14^2+x/1.14^3+300/1.14^4+400/1.14^5[where x=cash flow for year 3]

5000=300/1.14+300/1.14^2+x/1.14^3+300/1.14^4+400/1.14^5

5000=300[1/1.14+1/1.14^2+1/1.14^4]+x/1.14^3+400/1.14^5

5000=(300*2.238740788)+(x*0.674971516)+(400*0.519368664)

5000=879.369702+(x*0.674971516)

Hence x=(5000-879.369702)/0.674971516

=$6104.90(Approx).