Perform a financial analysis for a project. Assume the projected costs and benef

Question

Perform a financial analysis for a project. Assume the projected costs and benefits for this project are spread over four years as follows: Estimated costs are $200,000 in year 1 and $30,000 each year in years 2, 3, and 4. Estimated benefits are $0 in year 1 and $100,000 each year in years 2, 3, and 4. Use a 9 percent discount rate and round the discount factors to two decimal places. Create a spreadsheet to calculate and clearly display the NPV, ROI, and year in which payback occurs. In addition, write a paragraph explaining whether you would recommend investing in this project, based on your financial

Explanation / Answer

Computation of Present Values :-

Net Present Value = Presnt Value Estimated Benefits - Present Value of Estimated Cost

=> 232000 - 253600 = - $ 21600

Payback Period = 3 years + (290000-200000)/(300000-200000) * 12

=> 3 years + 10.8 months = 3 years 11 months approx.

Conclusion : The organization should not invest in this project, since the Net Present Value is negative and Payback period is very high, which is almost equal to the life of the project.

Year Estimated Cost Estimated Benefits Cummulative Benefits Amount ($) Present Value Factor Present Valu ($) Amount ($) Present Value Factor Present Valu ($) 1 200000 0.92 184000 0 0.92 0 0 2 30000 0.84 25200 100000 0.84 84000 100000 3 30000 0.77 23100 100000 0.77 77000 200000 4 30000 0.71 21300 100000 0.71 71000 300000 Total 290000 253600 300000 232000

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