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

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