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CORPORATE FINANCE 80213 TOPIC 1 } INVESTMENT APPRAISAL WE USE CASH FLOW PROJECTIONS TO DETERMINE FEASIBILITY CASH FLOWS ARISING AT THE START OF AN INVESTMENT PROJECT ARE CALLED UPFRONT CASH CASH FLOWS ARISING AT THE END OF A PROJECT ARE CALLED TERMINAL CASH FLOWS INVESTMENT = AN UPFRONT CASH OUTFLOW WITH THE HOPE OF CASH INFLOWS INTO THE FUT CASH FLOW PROFILE : Y0 Y1 Y2 Y3 Y4 Y5 Investment (x) Cash Inflow x x x x x Operating Cash Outflows (x) (x) (x) (x) (x) Operating Net Cash Flow x x x x x FINAL NET CASH FLOWS (x) x x x x x EXAMPLES : Y0 Y1 Y2 Y3 Y4 Y5 NET CASH FLOWS Project CF -50 10 15 20 30 25 Q1 : HOW FAST CAN WE RECOVER OUR CAPITAL INVESTED ? Cumulative Net Cash Flo w -50 -40 -25 -5 < ------- 3 Years ---------- > 0.17 year Payback Period = 3.17 years This is the time period taken to recover our initial investment Y0 Y1 Y2 Y3 Y4 Project A -100 35 45 60 70 Cumulative Net Cash Flo w -100 -65 -20 = 20 /60 Payback Period = 2.333 years or 2 years 4 months Project C & D Y0 Y1 Y2 Y3 Y4 Project C -100 50 30 20 50 Project D -100 20 30 50 50 Comment : The payback period is not able to consider timing of cash flows within the payback period. To solve this matter, discounted payb can be calculated.

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