Question

This project can be undertaken in any time from now. The discount rate is 10%. The present values of the revenues and the costs at each year are given below. What is the optimal investment time?

Year	0	1	2	3
Cost	$20.00	$18.00	$15.00	$14.50
Revenues	$25.00	$25.00	$25.00	$25.00

____

A) Now

B) Year 1

C) Year 2

D) Year 3

Answer 1

Year 0

Revenue=25

Cost =20

Income =5

Present value=5

Year 1

Revenue=25

Cost =18

Income =7

Discounting Factor 10% at 1 year =0.909

Present value of Ist Year cash flow =7/0.909=7.70

Year 2

Revenue=25

Cost =15

Income =10

Discounting Factor 10% at 2 years =1.736

Present value of 2nd Year cash flow =10/1.736=5.76

Year 3

Revenue=25

Cost =14.5

Income =10.5

Discounting Factor 10% at 3 years =2.487

Present value of 3rd Year cash flow =10.5/2.487=4.22

Present value is higher in Year 1

Answer Should be B i.e Year 1 .