Question

Consider a highway project with the following costs and benefits. This representation of costs and benefits...

Consider a highway project with the following costs and benefits. This representation of costs and benefits assumes the costs occur immediately and the benefits occur at the end of year 1, end of year 2 and the end of year 3.

Year

0

1

2

3

Costs

$470,000

Benefits

$275,000

$295,000

$315,000

(a) Calculate the net present value of the project. Assume a discount rate of 4%.

(b) Now suppose all the benefits occur at the start of each period. What happens to your net present value calculation?

Homework Answers

Answer #1

a) Net present value of the project = P0 + P1(1 + r)^-1 + P2(1 + r)^-2 + P3(1 + r)^-3

= -470,000 + 275,000(1 + 4%)^-1 + 295,000(1 + 4%)^-2 + 315,000(1 + 4%)^-3

= $347,201

b) When all benefits occur in the beginning of each period we have

Net present value of the project = P0 + P1 + P2(1 + r)^-1 + P3(1 + r)^-2

= -470,000 + 275,000 + 295,000(1 + 4%)^-1 + 315,000(1 + 4%)^-2

= $379,889

Net present value rises when benefits are received in the beginning of the year.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Assume that the project is expected to return monetary benefits of $20,000 the first year, and...
Assume that the project is expected to return monetary benefits of $20,000 the first year, and increasing benefits of $5,000 until the end of project life (year 1 = $20,000, year 2 = $25,000, year 3 = $30,000). The project also has one-time costs of $30,000, and fixed recurring costs of $10,000 until the end of project life. The project has a discount rate of 8% and a three-year time horizon. Calculate overall net present value (NPV) of the project...
Conduct a Benefits-Cost Analysis on the following Highway Project using: Initial Costs of Tunnel $5,000,000 Annual...
Conduct a Benefits-Cost Analysis on the following Highway Project using: Initial Costs of Tunnel $5,000,000 Annual costs for operating/maintenance 150,000 Annual savings and benefits to travelers 250,000 Residual value of benefits after horizon 350,000 Useful life of investment 30 years Interest Rate 6% a. B-C Ratio of Annual Worth b. B-C Ratio of Future Worth c. B-C Ratio of Present Worth
Consider an environmental policy that promises to yield the following stream of benefits and costs: $1...
Consider an environmental policy that promises to yield the following stream of benefits and costs: $1 million of costs immediately and $500,000 of benefits immediately, along with a one- time benefit of $250,000 after 5 years, and another one-time benefit of $250,000 after 10 years. Write an expression for the present value net benefits (PNV) of the policy, assuming r is the discount rate. Would you recommend this policy? Briefly explain.
A project has the following cash flow. Year Costs Benefits 0 $10,000 0 1 $1,000 $5,000...
A project has the following cash flow. Year Costs Benefits 0 $10,000 0 1 $1,000 $5,000 2 $1,000 $5,000 3 $2,000 $6,000 4 $2,0000 $3,000 Assuming a discount rate of 10%, estimate the following: a)Net Present Value (NPV) b)Discounted Benefit-Cost Ratio c)Net discounted Benefit-Cost Ratio d)Is the project feasible? Explain your answer
Two government projects have the following benefit profiles: Project A Project B Initial Investment Cost 100,000...
Two government projects have the following benefit profiles: Project A Project B Initial Investment Cost 100,000 100,000 Benefits, Year 1 0 40,000 Benefits, Year 2 0 40,000 Benefits, Year 3 80,000 40,000 Benefits, Year 4 80,000 40,000 Which of the following statements is accurate? a. Because the combined benefits of the two projects over the four years each equals 160,000, the net present value of the projects will be equal. b. Because the sum of benefits (160,000) exceeds the investment...
Question 47 3 pts Assume that the project is expected to return monetary benefits of $20,000...
Question 47 3 pts Assume that the project is expected to return monetary benefits of $20,000 the first year, and increasing benefits of $5,000 until the end of project life (year 1 = $20,000, year 2 = $25,000, year 3 = $30,000). The project also has one-time costs of $30,000, and fixed recurring costs of $10,000 until the end of project life. The project has a discount rate of 8% and a three-year time horizon. Calculate the break-even point for...
Net Present Value Problem Discount rate 12% Project 1 Year 1 Year 2 Year 3 Year...
Net Present Value Problem Discount rate 12% Project 1 Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL Costs 220,000 35,000 35,000 25,000 20,000 ? Discount factor ? ? ? ? ? Discounted costs ? ? ? ? ? ? Benefits 0 80,000 80,000 65,000 60,000 ? Discount factor ? ? ? ? ? ? Discount benefits ? ? ? ? ? ? Discounted benefits – Discounted costs (NPV) ? ? ? ? ? ? ROI = ???...
Assume that the project is expected to return monetary benefits of $20,000 the first year, and...
Assume that the project is expected to return monetary benefits of $20,000 the first year, and increasing benefits of $5,000 until the end of project life (year 1 = $20,000, year 2 = $25,000, year 3 = $30,000). The project also has one-time costs of $30,000, and fixed recurring costs of $10,000 until the end of project life. The project has a discount rate of 8% and a three-year time horizon. Calculate overall overall return on investment (ROI) of the...
Assume that the project is expected to return monetary benefits of $20,000 the first year, and...
Assume that the project is expected to return monetary benefits of $20,000 the first year, and increasing benefits of $5,000 until the end of project life (year 1 = $20,000, year 2 = $25,000, year 3 = $30,000). The project also has one-time costs of $30,000, and fixed recurring costs of $10,000 until the end of project life. The project has a discount rate of 8% and a three-year time horizon. Calculate the break-even point for this project.
A project with a 3-year life will cost $50,000 now, and then generate revenues of $21,000...
A project with a 3-year life will cost $50,000 now, and then generate revenues of $21,000 and operating costs of $3,000 in year 1, $24,000 in revenue and operating costs of $3,000 in year 2, and $25,000 in revenue and operating costs of $3,000 in year 3. If the discount rate is 10%, what is the Net Present Value of the project? Round to the nearest whole number.