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

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