Question

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).

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.