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Capital Budgeting Models

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Stern Associates is considering a project that has the following cash flow data. What is the project's payback?

Year 0 1 2 3 4 5
Cash flows -\$1,100 \$300 \$310 \$320 \$330 \$340

If you have a 3 year loan that requires \$1,000 payments each year at 7% annual interest rate what would be the present value of the loan?

SOLUTION This solution is FREE courtesy of BrainMass!

Please refer attached file for better clarity of tables.

Problem 1

Year Cash Flow Cumulative cash flow
1 300 300
2 310 610
3 320 930
4 330 1260
5 340 1600

We find that initial investment of \$1100 is recovered in 4th year.
Amount to be recovered in Year 4=1100-930=170
Total cash flow in Year 4=330
Payback period=3+(170/330)=3.515151515 Years

Problem 2

Periodic Payments=PMT=-1000 Cash outflow
Rate of interest=RATE=7%
Number of periods=NPER=3
Type of payment=type=0 Assume year end payments
Future value of loan=FV=0
PV of loan amount=PV=?

We can use PV function in Excel to get the desired value

PV of loan amount=PV=\$2,624.32 =PV(D21,D22,D20,D24,D23)

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