A proposed project requires an investment of $1000 which is obtained as a loan a

Question

A proposed project requires an investment of $1000 which is obtained as a loan at the end of year 0. The project last 5 years and the loan is paid off as a fixed annual annuity over this period. i) Determine the annuity for a compound interest rate of 5%. ii) The project cost $200 per year to run and earns a profit of $800 per year, both for years 1 through 5. Draw the cash flow diagram for the project. Remember to include the annuity payments. iii) Given a time value of money of 10%, calculate the present value of the project. Is it a worth while investment?

Explanation / Answer

i) let annuity =A A*PVIFA(5%,5)=1000 A=1000/4.3295=230.97 ii) year cash flow 0 -1000 1 369.02 2 369.02 3 369.02 4 369.02 5 369.02 iii) NPV=-1000+369.02*PVIFA(10%,5)=398.88 yes it is worth investment

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