Question

ABC company is evaluating an engineering project which will last for 5 years. For an initial...

ABC company is evaluating an engineering project which will last for 5 years. For an initial investment of $95 million, annual net revenues are estimated to be $20 million in Year 1 to 3 and $39 million in Year 4 and 5. Assume the MARR is 6% per year and a salvage value of 1 million at the end of this project.

Use 4 decimal places of the discount factors to calculate the Present Worth of this project. Show your discounted cashflow (in millions) for each year and the Present Worth (in million).

Homework Answers

Answer #1

Step 1:Computation of the Present value of the discounted cash inflows

Year Cash flow( In millions) Disc @ 6% Discounted casf fows( in millions)
1 $20 0.9434 $18.8679
2 $20 0.8900 $17.7999
3 $20 0.8396 $16.7924
4 $39 0.7921 $30.8917
5 $39 0.7473 $29.1431
Total $113.4950

Step 2:Computation of the Present value of the salvage value

Present value of the salvage value = $ 1 Million /(1+6%)^5

= $ 1 Million * 0.7473

= $747300

Step 3:Computation of the Net Present value

Particulars Amount ( in millions)
PV of Discounted cash inflows $113.4950
PV of salvage value $0.7473
Total Cash infows $114.2423
Less: Intial Investment $95
Net Present value $19.2423

The Net Present value of the Project is $ 19.2423 millions

Decision: Since NPV is positive, it is advisable to aaccept the project.

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