Assume Cost of capital (i) =9.5% per year. 1. Calculate Net Present Value? 2. Is

Question

Assume Cost of capital (i) =9.5% per year.

1. Calculate Net Present Value?

2. Is this project worth while? Why?

A benefit cost analysis is conducted for a training program to reduce operator assembly Errors, thus reduce scrap cost Project benefit Scrap reduction of $700 in month 3 .Scrap reduction of S500 in month 4 Scrap reduction of S450 in month 5 and 6 Project Costs: Training material preparation: S400 in month !1 .Employee training: S840 in month 2 .Reporting of program effectiveness will cost S100 in month 6 S700 S450 S450 Cash (+) Cash(-) S100 S400 S840

Explanation / Answer

1.

Annual interest rate = 9.5%

Monthly interest rate R = 9.5%/12 = .7917%

Net present value = Present value of all benefits – present value of all costs

Net present value = (700/(1+.7917%)^3 + 500/(1+.7917%)^4 + 450/(1+.7917%)^5 + 450/(1+.7917%)^6) - (400/(1+.7917%) + 840/(1+.7917%)^2 + 100/(1+.7917%)^6)

Net present value = $710.82

So, net present value will be $710.82.

2.

This project is worth while, because it has positive net present value that is $710.82.

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