Swanson Brothers, Inc. is putting together a bid for a multi-year state project.

Question

Swanson Brothers, Inc. is putting together a bid for a multi-year state project. The project will have a lifespan of 15 years. If successful, the state will pay Swanson $110943 at the end of each year, increasing the payment by $34760 each subsequent year. The project will have expenses of $37236 per year. Part way through the project, Swanson will need to rent some special equipment at a cost of $3490 per year, with the cost decreasing by 10% each subsequent year. Swanson will make the first payment on the special equipment at the end of year 5 and will need the equipment through the end of year 15.

If Swanson remains on schedule, the company will receive a bonus of $91546 at the end of year 6. (Swanson plans on remaining on schedule.) Calculate the present worth of the project using an interest rate of 2% compounded yearly.

Notes: The first payment and the first year of expenses will occur at the end of year 1.

Be sure to count the years carefully when calculating the years for the cost of renting the special equipment.

Explanation / Answer

Soln : We need to checl on the cash flows in & out in each of the 15 years to get the PW of the project, with discount factor at interest rate of 2%.

Please refer the table for all the cash flows here:

As we have calculated here the PW = 3969909.58

Year ,t 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Revenue,r 110943 145703 180463 215223 249983 284743 319503 354263 389023 423783 458543 493303 528063 562823 597583 Expenses,e 37236 37236 37236 37236 37236 37236 37236 37236 37236 37236 37236 37236 37236 37236 37236 Cost of special equipment,c 3490 3141 2826.90 2544.21 2289.79 2060.81 1854.73 1669.26 1502.33 1352.10 1216.89 Bonus,b 91546 Total income I = r-e-c+b 73707 108467 143227 177987 209257 335912 279440.1 314482.8 349497.2 384486.2 419452.3 454397.7 489324.7 524234.9 559130.1 Discount rate 2% Discount factor = 1/1.02^t 0.98 0.96 0.94 0.92 0.91 0.89 0.87 0.85 0.84 0.82 0.80 0.79 0.77 0.76 0.74 PV, I *discount factor 72261.76 104255.1 134966 164432.5 189530.5 298280.2 243269.4 268408 292443.6 315412.6 337350 358289.5 378263.9 397304.5 415441.9 PW = sum of PV 3969909.58

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