Question

4. A company has $1.2 million to invest. One option is to invest the money in bonds that will pay interest of 8% compounded annually. A second option is to invest the money in an electric power generating station. The service life of the facility equipment in 50 years. The NET INCOME to the investor from sales of electricity (over operating expenses) is shown in the table:

Year	$/yr
1	$10,000
2	$20,000
3	$45,000
4	$65,000
5	$95,000
6	$110,000
7	$115,000
8	$120,000
9	$125,000
10 - 50	$130,000

Which option should the investor choose?

Answer 1

CALCULATION OF IRR FOR THE PROJECT

particulars

@10%

@20%

year	amount(,000)	pvf	amount	pvf	amount
0	1200	1	1200	1	1200
1	10	0.909	9.09	0.833	8.33
2	20	0.826	16.52	0.694	13.88
3	45	0.751	33.795	0.579	26.055
4	65	0.683	44.395	0.482	31.33
5	95	0.621	58.995	0.402	38.19
6	110	0.564	62.04	0.335	36.85

7	115	0.513	58.995	0.279	32.085
8	120	0.466	55.92	0.232	27.84
9	125	0.424	53	0.194	24.25
10-50	130	4.147	539.11	0.968	125.84
total			-268.14		-835.35

IRR=10%+NPV@10%/NPV@10%+NPV@20%(20-10)

=10%+(-268.14)/-268.14-835.35(10)

=12.43%

SINCE THE IRR OF THE PROJECT IS HIGHER THAN THE INVEST IN THE MONEY.SO THAT I WOULD PREFER TO INVEST IN THE PROJECT ONLY.