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Please use the formula not the excel sheet. A project has the following financial considerations: •...

A project has the following financial considerations: • initial cost of $30,000, • net revenues of $6,000 the second year, in

Please use the formula not the excel sheet.

A project has the following financial considerations: • initial cost of $30,000, • net revenues of $6,000 the second year, increasing by $500 thereafter for the next year for 10 years (i.e., revenue O the 1st year, $6,000 the 2nd year, $6,500 the 3rd year, and so on) • salvage value of $10,000 at the end of the gth year • MARR is 6%/year Please be sure to answer both part a and b of this question. a. What is the undiscounted payback period this project? b. What is the present value equivalent of the project cash flows over the entire 8 year period?
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Solution:

a. Calculation of undiscounted payback period

Year Cash Flow Cumulative Cash Flow
1 $0 $0
2 $6,000 $6,000
3 $6,500 $12,500
4 $7,000 $19,500
5 $7,500 $27,000
6 $8,000 $35,000
7 $8,500 $43,500
8 $9,000 + $10,000 (Salvage Value) $62,500

Initial cost = $30,000

Undiscounted payback period = 5 year + (Initial cost - Cash inflow recovered from 5 years)/ Cash flow of 6th year

= 5 year + ($30,000 - $27,000)/ $8,000

= 5 year + $3,000/$8,000

= 5 year + 0.375 year = 5.375 years

b. Calculation of net present value

Year Cash Flow Present Value Factor @ 6% Present Value
0 ($30,000) Initial Cost 1 ($30,000)
1 $0 0.9434 $0
2 $6,000 0.8900 $5,340
3 $6,500 0.8396 $5,457.40
4 $7,000 0.7921 $5,544.70
5 $7,500 0.7473 $5604.75
6 $8,000 0.7050 $5,640
7 $8,500 0.6651 $5,653.35
8 $9,000 + $10,000 (Salvage Value) 0.6274 $11,920.60
Net Present Value $15,160.80

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