Question

Suppose the City Mayor proposes a project that will cost $200,000 today (t=0), $100,000 next year (t=1) and 15,000 to destroy it after ten years of operation (t=12) when the project is discontinued. Once finished in three years (t=3), it will generate a flow of revenue of $40,000 per year until it is discontinued in (t=12). Set the discount rate as r and write the expected costs and benefits.

Answer 1

The expected cost are -

Initial investment of 200000 at the 0th year

Further investment of 100000 at the 1st year

Expenditure of 15000 at the end of 12th year. (assuming 12 is the life of the project)

Expected Benefits are -

Annual benefits of of 40000 from 3rd to 12th Year (for 10 years)

As per the information provided there will not be any cash flow on the 2nd year.

Let assume the rate of interest is 'r'

Present Worth of Outflows = -200000-150000(P/F, r, 1)-15000(P/F, r, 12)

Present Worth of Inflows = 40000(P/A, r, 10)(P/F, r , 3)