perform a present worth analysis per the following project using a MARR of 8% The initial...
perform a present worth analysis per the following project using a MARR of 8% The initial coast of the project is $100000, 60% of the initial cost will borrowed from a bonk using a loan that charges 5% interest componded annually. The loan will repaid with the equal annual payment .The project has life of 8 years. Revenne from the project will be $ 5000 in the first year and increasing by $3500 every year after that (ie: $5000 at the end of year 1,$8500 at the year 2, $12000 at Year 3) what the present worth of this project？ Should this project be selected？
Homework Answers
Solution:
Initial investment = $100,000 * 40% = $40,000
Bank Loan to finance the project = $100,000 * 60% = $60,000
Annual installment for loan repayment = $60,000 / Cumulative PV factor at 5% for 8 periods
= $60,000 / 6.463213 = $9,283
| Computation of Present worth of Project | |||||||||
| Particulars | Total | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 |
| Annual Cash Inflows: | |||||||||
| Revenue | $5,000 | $8,500 | $12,000 | $15,500 | $19,000 | $22,500 | $26,000 | $29,500 | |
| Repayment of bank loan | -$9,283 | -$9,283 | -$9,283 | -$9,283 | -$9,283 | -$9,283 | -$9,283 | -$9,283 | |
| Net Annual cash inflows | -$4,283 | -$783 | $2,717 | $6,217 | $9,717 | $13,217 | $16,717 | $20,217 | |
| PV Factor at 8% | 0.925926 | 0.857339 | 0.793832 | 0.735030 | 0.680583 | 0.630170 | 0.583490 | 0.540269 | |
| Present value of cash inflows | $37,708 | -$3,966 | -$671 | $2,157 | $4,570 | $6,613 | $8,329 | $9,754 | $10,923 |
| Initial investment | $40,000 | ||||||||
| Net Present worth | -$2,292 | ||||||||
As net present worth is negative, therefore project should not be selected.
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