Question

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

Answer 1

Year	Cost	Benefit	Cash Flows = Benefit - Cost
0	10000	0	-10000
1	1000	5000	4000
2	1000	5000	4000
3	2000	6000	4000
4	20000	3000	-17000

Discount rate = 10%

a)

= $ 4000 / (1.1)¹ + $ 4000 / (1.1)² + $ 4000 / (1.1)³ - $ 17000 / (1.1)⁴ - $ 10000

= - $ 11663

b) Discounted Benefit Cost Value = $ 4000 / (1.1)¹ + $ 4000 / (1.1)² + $ 4000 / (1.1)³ - $ 17000 / (1.1)⁴

= - $ 1663

= - $ 1663 / $ 10000

= - 0.16

c)

= - $ 11663 / $ 10000

= - 1.16

d) No, the project is not feasible as the NPV is less than 0 and will not add value to shareholders wealth