Question

. Consider a project with 3 years of physical life. If the project is terminated before, the following are the cash flows (CF) and salvage values (SV):

Yr                CF (Rs.)                   SV (Rs.)

0                  -6000                      6000

1                   3000                       4000

2                    2700                      2500

3                    1500                       -

Is the project acceptable at all? If yes, under what duration of economic life?

Answer 1

Answer : To evaluate whether the project should be accepted or not we need to compare Cash Inflows with the initial investment of (6000) at the end of each year :

Year	Outflow	Total Inflow	Net (Total Inflow - Outflow)
0	6000	6000 (SV)	- (6000 - 6000)
1	6000	3000 (CF) + 4000(SV) = 7000	1000 (7000 - 6000)
2	6000	3000 (CF of year1) + 2700(CF of year2) + 2500 (SV) = 8200	2200 (8200 - 6000)
3	6000	3000 (CF of year1) + 2700(CF of year2) + 1500 (CF of year3) = 7200	1200 (7200 - 6000)

Therefore the project gives positive inflow all the year and maximum inflow is in year 2 , therefore the project is acceptable and duaration should be taken as 2 years.