# Cash Investment Week 3

Cash Investment Week 3

## Overview

A company’s growth and development, and indeed its ability to remain competitive and survive, depends upon a constant flow of new investment ideas.  The most common and effective method used to evaluate investments in long-term projects is to determine each project’s net present value (NPV). The process of determining whether the future cash flow benefits arising from a long-term project are sufficient to justify the required up-front cash investment is also called capital budgeting. The net present value method uses a discount rate (interest rate) to restate all cash flows in terms of present values, and then makes comparisons on which project has the highest net present value.

#### How many pages is this assigment?

In this project you are provided expected cash flows over the course of five years for two alternative long-term projects that XYZ Entertainment Company is considering investing in. XYZ will only invest in one of the projects. XYZ uses a discount rate (interest rate) of 18% to calculate the present value of future cash flows.

## What You’ll Need

• Internet access
• MS Word software

## Prepare

• Complete the Week 3 Read & View assignment.
• Use the XYZ cash flow projections below to complete your calculations for this project.
• XYZ Long-Term Cash Flow Projection for Project A

Cash Investment at start of project (initial cash outflow) = (\$1,000,000)

Year 1: Cash inflow = \$350,000

Year 2: Cash inflow = \$350,000

Year 3: Cash inflow = \$350,000

Year 4: Cash inflow = \$350,000

Year 5: Cash inflow = \$350,000

• XYZ Long-Term Cash Flow Projection for Project B

Cash Investment at start of project (initial cash outflow) = (\$1,000,000)

Year 1: Cash inflow = \$450,000

Year 2: Cash inflow = \$500,000

Year 3: Cash inflow = \$500,000

Year 4: Cash inflow = \$150,000

Year 5: Cash inflow = \$150,000

The formula to calculate the present value of each year’s future cash inflow is:

Present Value = Future Value / (1 + interest rate)Number of Years

Follow these steps to determine each project’s net present value (NPV):

1. Calculate the present value of the cash inflows for each of the 5 years.

2. Sum all 5 years of calculated present values.

3. Subtract the cash investment at the start of the project (initial cash outflow).

4. The result will be the projects’s net present value.

## Create

Use XYZ Entertainment Company’s 5-year Cash Flow projections for Project A and Project B to complete the Project 3 Answer Sheet. Include the following information:

1. The net present value (NPV) of Project A

• The present value of cash inflow for year 1
• The present value of cash inflow for year 2
• The present value of cash inflow for year 3
• The present value of cash inflow for year 4
• The present value of cash inflow for year 5

2.  The net present value (NPV) of Project B

• The present value of cash inflow for year 1
• The present value of cash inflow for year 2
• The present value of cash inflow for year 3
• The present value of cash inflow for year 4
• The present value of cash inflow for year 5

3.  Which project has the highest net present value (Project A or Project B)?

## Submit

1. Save your completed Project 3 Answer Sheet as a PDF document.