8. There is a project being considered that has an initial cost of $5,000. The f
ID: 2722454 • Letter: 8
Question
8. There is a project being considered that has an initial cost of $5,000. The first year profit is $500 and profits are expected to increase by 50% every year after that. Project costs are expected to be $1,000 for the first two years and then decrease by 5% every year after that. The project life is expected to be 10 years and the company MARR is 10%.
a) What is the payback period for this project?
b) What is the rate of return for this project?
c) What is the present worth of this project?
d) The project must be shortened to 6 years. Under this constraint, is the project worth doing and why?
Explanation / Answer
Answer to the Question
Workings
Answer to point no(a)
Payback period of the project=5+(1683.47/365*1461.94)
=5year and 317days.
Answer to point no(b)
Rate of return from the project=36.54%.
Answer to point no(c)
present worth of this project $20,069.38.
Answer to point no(d)
Yes, if the project period shortened to 6years because NPV IS POSITIVE $221.53 and recovered its project cost.
Year Net Cash Flow PVF @ 10 % PV of Future Cash Flow Cumulative cash flow 0 (5,000.00) 1.000 (5,000.00) (5,000.00) 1 (500.00) 0.909 (454.55) (5,454.55) 2 (250.00) 0.826 (206.61) (5,661.16) 3 2,075.00 0.751 1,558.98 (4,102.18) 4 785.00 0.683 536.17 (3,566.01) 5 3,388.63 0.621 2,104.07 (1,461.94) 6 2,982.37 0.564 1,683.47 221.53 7 6,469.09 0.513 3,319.67 3,541.19 8 7,807.88 0.467 3,642.43 7,183.63 9 13,512.79 0.424 5,730.74 12,914.37 10 18,558.26 0.386 7,155.01 20,069.38 NPV 20,069.38Related Questions
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