You are contemplating a business venture, which involves an initial investment o

Question

You are contemplating a business venture, which involves an initial investment of $150,000 followed by an additional investment of $30,000 at the end of first year and $20,000 at the end of 2nd year. You want to analyze the venture over a project life of 10 years (measured from today). Cost of Capital (MARR) = 12%.   The venture will result in benefit of $170,000 in the 3rd year and increasing at 4% per year. The operating expenses are estimated to be $50,000 in the 3rd year and decreasing at 2% per year.    At the end of the project life, you will sell the business for $20,000. Do the analysis using before tax cash flows. In before tax analysis, taxes are ignored and depreciation is not relevant.

Compute

a) Net Present Value (NPV)

b) Profitability Index (PI)

c) Internal Rate of Return (IRR)

d) Discounted Payback

Is the project acceptable?

Explanation / Answer

Ans

Discounted Payback

Project is accetable all the apprisal methods gives a postive result for Project.

Workings

NPV Details Amount Present value of Cost of Project -1,92,729.59 Present Value of benefit     5,70,788.97 Present Value of Residual Value 6439.464732 NPV     3,84,498.84

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