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

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?

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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