Question

Perform a financial analysis for a project using the format provided in Figure 4-5. Assume that the projected costs and benefits for this project are spread over four years as follows: Estimated costs are $200,000 in Year 1 and $30,000 each year in Years 2, 3, and 4. Estimated benefits are $0 in Year 1 and $100,000 each year in Years 2, 3, and 4. Use a 10 percent discount rate, and round the discount factors to two decimal places. Create a spreadsheet or use the business case financials template on the companion website to calculate and clearly display the NPV, ROI, and year in which payback occurs. In addition, write a paragraph explaining whether you would recommend investing in this project, based on your financial analysis

Answer 1

Year	Projected Benefits	Projected cost	Net benefit	PVF (10%)	PVCF
1	0	200000	-200000	0.91	-181818
2	100000	30000	70000	0.83	57851.24
3	100000	30000	70000	0.75	52592.04
4	100000	30000	70000	0.68	47810.94
	Net Present Value				-23564

ROI = Average net benefit / Average cost

= (75000 - 72500) / 72500

= 3.33%

Year in which payback occurs

Year	Projected Benefits	Projected cost	Net benefit	Cumulative net benefits
1	0	200000	-200000	-200000
2	100000	30000	70000	-130000
3	100000	30000	70000	-60000
4	100000	30000	70000	10000

Payback period = Year 3 + ( - 60000 - 0) / [ -60000 - 10000 ]

= 3.86 years