What is the present worth of all disbursements and receipts during the life time

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 $2650000 (per year paid at the end of each year) Phase 1 Material $880000 (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 $7300000 Insurance $500000 Labor $1950000 Material $680000 The project makes an annual income of $11000000 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

Year Deiails of cash flow Inflow/Outflow PV F @25% PV @ 25% Phase 1 1 Labor -2650000 0.8 -2120000 1 Material -880000 0.8 -704000 2 Labor -2650000 0.64 -1696000 3 Labor -2650000 0.512 -1356800 Phase 2 4 Launch -7300000 0.4096 -2990080 4 Insurance -500000 0.4096 -204800 4 Labor -1950000 0.4096 -798720 4 Material -680000 0.4096 -278528 4 Annual Sales 11000000 0.4096 4505600 5 Annual Inflow 570000 0.32768 186777.6 6 Annual Inflow 570000 0.262144 149422.1 7 Annual Inflow 570000 0.2097152 119537.7 8 Annual Inflow 570000 0.1677722 95630.13 9 Annual Inflow 570000 0.1342177 76504.1 10 Annual Inflow 570000 0.1073742 61203.28 Present worth of all disbursements and receipts during the life time of the project, evaluated at the beginning of the first year -4954253 Summary The present value of the net cash flow of phase 2, evaluated at the beginning of first year = 922546.9 Sum of the present worth of labor and material costs of phase 1, also evaluated at the beginning of first year = -5876800 Present Worth of the project= -4954253 NOTE: Annual inflow from Years 5 to 10 =11000000-(7300000+500000+1950000+680000)= 570000

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