Anyway, break the problem down into 3 components.
1) The $30,000 earned at the end of each year for 3 years at 20% has a PV of $63,194.
2) The $30,000 earned for the next 3 years at 10% has a PV of $74,606. However, now we have to discount this sum at a rate of 20% for the 3 year deferral, resulting in an actual PV of $43,175.
3) Add the 2 numbers together for a total of $117,781, which is more than the required original investment of $100,000 and there is a net present value and the project is worthwhile to undertake. And here are some online financial calculators to do the heavy lifting:
http://www.calculatorsoup.com/calculator...
http://www.calculatorsoup.com/calculator...
Cleaveland Consolidated is expecting capital rationing to last for the next 3 years. The company's cost of capital is 10%, and that cost of capital is expected to continue indefinitely. Cash flows available prior to year of 3 are expected to earn a rate of return of 20% a year until the end of capital rationaing. A proposed capital investment costs $100,000 and is expected to generate cash flows of $30,000 at the end of each year for 6 years. Is the investment attractive? Why?
