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.

Would you recommend investing in this project? Why?

Answer 1

Solution:

We can evaluate the project on the basis of Net present value

Initial cash outflow=Initial Investement

=$95000,000

Statement showing present value of cash inflows(Rate of discounting is 6%)

Year	1-3	4	5
Net Revenue	$20,000,000	$39000,000	$39,000,000
Salvage value	0	0	$1,000,000
Total cash inflows(a)	$20,000,000	$39000,000	$40,000,000
Present value factor@6%(b)	2.6730	0.7921	0.7473
Present value of cash inflows	$53,460,000	$30891,900	$29,892,000

Net Present value=Sum of Present value of cash inflows-Initial cash outflow

=($53,460,000+$30891,900+$29,892,000)-$95000,000

=$114,243,900-$95000,000

=$19,243,900

Since the net present value of project is positive(i.e. higher than 0),thus I would recommend to invest in the project.