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Quantitative Methods Tutorial 3

The document outlines a tutorial for Quantitative Methods at the University of Namibia, focusing on cash flow analysis and investment evaluation. It includes exercises on calculating payback periods, discounted payback periods, and Net Present Value (NPV) for various projects. Additionally, it discusses decision-making criteria for selecting projects based on financial metrics.

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19 views2 pages

Quantitative Methods Tutorial 3

The document outlines a tutorial for Quantitative Methods at the University of Namibia, focusing on cash flow analysis and investment evaluation. It includes exercises on calculating payback periods, discounted payback periods, and Net Present Value (NPV) for various projects. Additionally, it discusses decision-making criteria for selecting projects based on financial metrics.

Uploaded by

tt840912
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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UNIVERSITY OF NAMIBIA

QUANTITATIVE METHODS (G3571MQ)


TUTORIAL 3
1.
Year 0 1 2 3 4
Cash Flow (300) 30 180 90 50

Determine the payback period for the above Project.


2.
Year 0 1 2 3 4
Cash Flow -270 80 180 90 50

Determine the payback period for the above Project.


3.
Cashflow for project A and B.
Year Project A (N$) Project B (N$)
0 (450) (500)
1 150 200
2 120 110
3 150 170
4 100 150

a)
By using the payback method, determine which project should be chosen.
b)
By using the discounted payback method at the rate of 15%, determine which project
should be chosen.
c)
By using the Net Present Value (NPV) method, determine, which project should be chosen
if projects A are discounted at 10 percent and B are discounted at 12 percent.

4.
It is estimated that an investment in a new process will cause the following cash flow (in
N$):

Year 0 1 2 3 4 5 6
Cash inflow 10000 15000 20000 20000 20000 20000
Cash outflow 60000

The firm wishes to earn at least 15% per annum on projects of this type. Calculate the Net
Present Value of the project and comment on the course of action to be taken.

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UNIVERSITY OF NAMIBIA
QUANTITATIVE METHODS (G3571MQ)
TUTORIAL 3
5.
The following two capital projects involve the purchase, use, and final disposal of two
machines A and B.
Initial cost Net Cash Flows
Year 1 Year 2 Year 3 Year 4
Machine A 50 000 25 500 24 500 17 000 14 000
Machine B 45 000 12 500 15 500 21 000 38 000

Choose between the two projects by using the NPV method – using a cost of capital of
22%.

6.

Year 0 1 2 3 4
Cash Flow -5200 1200 2800 1200 1500

Determine the discounted payback period for this project at the discounted rate of 10%.

~THE END~

𝑭𝑽
𝑷𝑽 =
𝒓 𝒕
(𝟏 + 𝟏𝟎𝟎)

𝑛
𝐹𝑉
𝑁𝑃𝑉 = ∑ − 𝐶𝑜𝑠𝑡
𝑟 𝑡
𝑡=1 (1 +
100)
𝑭𝑽 𝑭𝑽 𝑭𝑽 𝑭𝑽
𝑁𝑃𝑉 = −𝐶𝑜𝑠𝑡 + + + + ⋯..+
𝒓 𝟏 𝒓 𝟐 𝒓 𝟑 𝒓 𝒏
(𝟏 +
(𝟏 +
𝟏𝟎𝟎 ) (𝟏 +
𝟏𝟎𝟎 ) (𝟏 +
𝟏𝟎𝟎 ) 𝟏𝟎𝟎)

𝑃𝑉 = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒
𝐹𝑉 = 𝑎𝑚𝑜𝑢𝑛𝑡, 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑖𝑛 𝑛 𝑦𝑒𝑎𝑟𝑠 𝑡𝑖𝑚𝑒/𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤
𝑟 = 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑒𝑑 𝑟𝑎𝑡𝑒 (𝑎𝑠 𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛)
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑡𝑖𝑚𝑒 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 (𝑛𝑜𝑟𝑚𝑎𝑙𝑙𝑦 𝑦𝑒𝑎𝑟𝑠)

Cost of capital is the minimum rate of return or profit a company must earn before generating
value. It's calculated by a business's accounting department to determine financial risk and
whether an investment is justified.

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