5. a.
Year
Cash Flow
Cumulated cash flow
1
250000
250000
2
500000
750000
3
750000
1500000
4
750000
2250000
5
750000
3000000
6
750000
3750000
7
750000
4500000
In year 5, the cumulated cash flow equals the initial investment of $3m.
Hence, the
payback period = 5 years.
b. The net present value = present value of the inflows  $3b. = 5,724,015.7  3 = $2.72b.
6.
Year
FCFF
PV @ 10%
PV @ 15%
0
(2,000,000.00) 2,000,000.00)
(2,000,000.00)
1
100,000.00
90,909.09
86,956.52
2
300,000.00
247,933.88
226,843.10
3
300,000.00
225,394.44
197,254.87
4
300,000.00
204,904.04
171,525.97
5
300,000.00
186,276.40
149,153.02
6
300,000.00
169,342.18
129,698.28
7
300,000.00
153,947.44
112,781.11
8
300,000.00
139,952.21
98,070.53
9
300,000.00
127,229.29
85,278.72
10
300,000.00
115,662.99
74,155.41
NPV
(338,448.05)
(668,282.46)
The project should not be accepted at either discount rate.
7. The present value of the annual free cash flow to equity can be computed using the
annuity formula:
PV
=
50000
0.14
(1

1
(1.14)
10
)
=
$260,805.78
.
This would be the maximum
initial investment.