nroperty oanl of $1000 pe can be acquired 8.32 A state agency is contemplating b
ID: 2782648 • Letter: N
Question
nroperty oanl of $1000 pe can be acquired 8.32 A state agency is contemplating building a new 5630-acre industrial park. The property can be t0ny this year, at a cost of $1000 per acre. Roadways and other improvements are estimated to cost a total of 10ed will be moved out over the next three years; the displacement costs are estimated at $1 000000erty ovide the state with new tax acre, with these costs spread evenly over the next 10 years. The few residents currently on the pr $500000 next year, and $200000 the year after. The park is expected to provide the statewthear per year revenues of $5 000 000 per year, starting five years from now, with an increase of $2000 000 the project will be borrowed at an interest rate of 7% per year, compounded annually (a) what is present-worth NBV of the project? (b) What is the present-worth BCR justifiable?Ans. (a) $14 401 566; (b) 2.30; (c) yes thereafter. The state has decided to evaluate this project on the basis of a 10-year lifetime. The funds the ? (c) Is the project economically 2 188 201 12Explanation / Answer
Lets collate the information first.
The property acquisition cost will be paid now at Y0. Road and other improvements will be $1000 per acre in total. Since, these are evenly spread, the costs per acre per year will be $100 (1000 / 10). Displacement cost will occur at Y1, Y2 and Y3. Revenues will start from year 6 and will increase $2,000,000 thereon. Rate of Interest being 7%.
$5,000,000 + $2,000,000 = $7,000,000
a) Present-worth NBV = Present Value of Cash Inflows - Present Value of Cash Outflows
Or, Present-worth NBV = $25,520,820 - $11,118,836 = $14,401,984 (There is a Rounding off difference in the answer)
b) Present-worth Benefit Cost Ratio (BCR) = Present Value of Cash Inflows / Present Value of Cash Outflows
Or, Present-worth Benefit Cost Ratio (BCR) = $25,520,820 / $11,118,836 = 2.30
c) Yes, the project is economically justifiable as its present-worth NBV is positive and it also has a high present-worth BCR ratio.
Present Value of Cash Outflows Particulars Year PVF@7% (a) Amount (b) Present Value (a x b) Property Cost 0 1 5630 x $1,000 = $5,630,000 $5,630,000 Add: Roadways and other Improvements 1-10 7.02358 5630 x $100 = $563,000 $3,954,276 Add: Displacement Costs 1 0.93458 $1,000,000 $934,580 2 0.87344 $500,000 $436,720 3 0.81630 $200,000 $163,260 Present Value of Cash Outflows $11,118,836Related Questions
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