What is the present worth of all disbursements and receipts during the life time
ID: 2763334 • Letter: W
Question
What is the present worth of all disbursements and receipts during the life time of the project, evaluated at the beginning of the first year, if the project has the following costs: Phase 1 labor $2700000 (per year paid at the end of each year) Phase 1 Material $750000 (paid at the end of the first year only Phase 2 -years 4 to 10, all costs are paid at the end of each year and include: Launch $6400000 Insurance $520000 Labor $1750000 Material $830000 The project makes an annual income of $13000000 as a result of sales in phase 2. Hint: The present value of the net cash flow of phase 2, evaluated at the beginning of first year, must be greater than the sum of the present worth of labor and material costs of phase 1, also evaluated at the beginning of first year. The difference would be the answer to this problem. Make sure to include the sign (-) if the answer is negative. Remember, if the present worth of all disbursements and receipts is positive, the company will make at least 25% annual return on this investment.
Explanation / Answer
Cashflow during Phase 2 - Year 4 -10 Cash Outflow Launch $6,400,000 Insurance $520,000 Labor $1,750,000 Material $830,000 Total (a) $9,500,000 Sales (b) $13,000,000 Net Inflow (c = b-a) $3,500,000 Annuity Factor at 25% for 7 years (d) 3.1611 Present Worth at the Beginning of 4th Year (e=c*d) $11,063,987.20 Discount Factor at 25% for 3 years (f) 0.512 Present Worth at the beginning of Phase 1 (g = e*f) $5,664,761.45 Phase 1 - Cashflow Calculations Cash Outflow Labor Cost (h) $2,700,000 Annuity Factor at 25% for 3 years (i) 1.952 Present Worth of Labor Cost (j=h*i) $5,270,400 Material Cost (k) $750,000 Discount Factor at 25% for 1 year (l) 0.8 Present Worth of Material Cost Cost (m=k*l) $600,000 Present Worth of Cash Outflow in Phase 1 (n=j+m) $5,870,400 Present Worth of Project (g-n) -$205,638.55
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