Question

You have to evaluate an Infrastructure Investment project in Illinois. To make a solid recommendation you have to calculate the NPV, Payback Period, and the IRR as we discussed in class.

The initial investment is $22,000,000, and the program requires an annual maintenance fee of $1,000,000 at the end of each year. The rate of return i = 0.1 (10%)

The revenue for this project is estimated as follows:

Calendar
Year

   2012
   2013
   2014
   2015
   2016

Annual Revenue

1 4,000,100

2 6,001,000

3 8,025,000

4 11,350,000

5 10,000,050

                   

If you were asked to include an inflation rate of 3% per year into your evaluation, would that change the outcome of your analysis?

1 Note: Discount factor = (1+??+?? )??

K = rate of return, i = inflation, n = year

In class our discount factor was 1/ (1+0.05)n

Answer 1

Solutions Calculatên of Net Beyond Value (neu) : NPV = Cash flowe initial investment (4+00)* Here, is required rectum. t = Number of time period Ineffal vestment = $22,000,000 Retwin rate : 40% 2. Year Annual Revenuec) 2012 4,000,000 2013 6.004000 2014 2015 a 11350,000 2016 10.000,050 not Total 28.581.497 NPV = 28,581,497 - 22,000,000 $ 6,581,497 Computation of NPU CL) 4000,100 / (1+0,1) 6,001.000 / (1+0.4) 2025,000 |(10.1) 11,350,000 (1+0,134 10,000,050 / (1+0.1) 8025,000 - Calculation of Payback perpode Sovittal lowestment total outflow = $ 22,000,000 Cash inflows are: ( $ 4000 100e4 $4000.000 $6.001,000 $ 600,000 $ 8025,000 $ 8025,000 2015 $ 11,350,000 $ 11,350,000 $ 10,000,050 $ 10,000,000 2012 2013 2014 2016

Cumulative flow O Pay back period can be calculated as Year Total flow (8000) ('000) (22,000) (22,000) 4,000 (18.000) 6,001 (11,999) 8025 (3974 2015 11,350 7376 2016 10,000 2624 2012 2013 2014 2014 3rd • Year in which outflow becomes posstive means year 6. 40 2014 & Total cumulative floco total flow of conne cutive year 0.35 3974 11,350 → Payback peopod= +0 3+ 0.35 = see 3.35 yearu - → Calculation of Porterval Rate of Return GIRR) Internal rate of retwen in a delscount rate that makes Now of future cash flour IRR for this date = 19.364% for exactly zero.