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Name 4) Fill in the following table to caloulate the net present vallue and benefit/cost ratio of each investment. Round to t


Name Module 11 Assignment Answer the folowing questions by filing in the blonks and moking the appropriate colculations. Roun
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Answer #1

Investment A

Year

cost

Cash flow

working

cost yet to be recovered

0

16000

0

                  -  

1

1,850

16000-1850

          14,150

2

1,925

14150-1925

          12,225

3

2,567

12225-2567

            9,658

4

3,850

9658-3850

            5,808

5

3,850

5808-3850

            1,958

6

5,133

1958-5133

           -3,175

7

5,775

8

5,850

as we can see that the cost to be recovered turns negative in the 6th year

that means that the cost is recovered between 5th and 6th year

Now, Payback period = years before full recovery + (Unrecovered investment at start of the year/Cash flow during the year)

Payback period =5 + (1958/5133)

Payback period =5.38 years or 5 years 4.5 months

So payback period of Investment A is 5 years aprox.

investment B

Year

cost

Cash flow

working

cost yet to be recovered

0

9500

0

                  -  

1

3,200

9500-3200

            6,300

2

3,200

6300-3200

            3,100

3

3,200

3100-3200

              -100

4

3,000

5

3,000

as we can see that the cost to be recovered turns negative in the 3rd year

that means that the cost is recovered between 2nd and 3rd year

Now, Payback period = years before full recovery + (Unrecovered investment at start of the year/Cash flow during the year)

Payback period =2 + (3100/3200)

Payback period =2.97 years or 2 years 11.6 months or 3 years approx.

So payback period of Investment b is 3 years

  1. As we can see that investment A takes 5 years to payback the initial cost and investment B takes 3 years to payback the initial cost,

We will choose investment B , as it takes less time to payback the cost and so is more profitable.

    Investment

    years

    Average

    A

    1

    2

    3

    4

    5

    6

    7

    8

    after tax benefit

    1,850

    1,925

    2,567

    3,850

    3,850

    5,133

    5,775

    5,850

    value of A

    1st Jan

    -

    1,850

    3,775

    6,342

    10,192

    14,042

    19,175

    24,950

    31st Dec

    1,850

    1,925

    2,567

    3,850

    3,850

    5,133

    5,775

    5,850

    Average

    1850

    1887.5

    2114

    2548

    2,808.40

    3,195.83

    3,564.29

    3850

    Average annual rate of return for A

    26%

    Here , 1st jan balance is last years closing balance

    Closing balance is the after tax benefit of that years

    Average is the opening balance + closing balance / number of years

    For example. For the 2nd year

    Opening balance = 1850

    Closing = 1925

    Average = 1850+1925/2

    Average annual rate of return = average annual net earning / initial cost *100

    Here annual avg earning= 3850

    Initial cost = investment –salvage value

    = 16000-1000

    AARR= 3850/(16000-1000) *100

    = 25.67 or 26%

    Similarly for investment B

    investment

    years

    Average

    B

    1

    2

    3

    4

    5

    after tax benefit

    3200

    3200

    3200

    3000

    3000

    value of B

    1st Jan

    -

    3,200

    6,400

    9,600

    12,600

    31st Dec

    3,200

    3,200

    3,200

    3,000

    3,000

    Average

    3200

    3200

    3200

    3150

    3,120.00

    Average annual rate of return for B

    35%

    1. Investment A

    Year (n)

    Cash Flow

    working : factor= 1/(1+r)^n
    (r= 8.00%)

    present value factor = 1/(1+r)^n

    after tax present value = Cash flow * discount value

    1

    1,850

    1/ (1+0.08)^1

    0.93

    $                     1,712.96

    2

    1,925

    1/ (1+0.08)^2

    0.86

    $                     1,650.38

    3

    2,567

    1/ (1+0.08)^3

    0.79

    $                     2,037.77

    4

    3,850

    1/ (1+0.08)^4

    0.74

    $                     2,829.86

    5

    3,850

    1/ (1+0.08)^5

    0.68

    $                     2,620.25

    6

    5,133

    1/ (1+0.08)^6

    0.63

    $                     3,234.66

    7

    5,775

    1/ (1+0.08)^7

    0.58

    $                     3,369.66

    8

    5,850

    1/ (1+0.08)^8

    0.54

    $                     3,160.57

    Total

    $                   20,616.11

    Less : initial investment

    $                   16,000.00

    Net present value

    $                     4,616.11

    benefit cost ratio

    = 20616/16000= 1.29

    Investment B

    Year (n)

    Cash Flow

    working : factor= 1/(1+r)^n
    (r= 8.00%)

    present value factor = 1/(1+r)^n

    after tax present value = Cash flow * discount value

    1

    3,200

    1/ (1+0.08)^1

    0.93

    $                     2,962.96

    2

    3,200

    1/ (1+0.08)^2

    0.86

    $                     2,743.48

    3

    3,200

    1/ (1+0.08)^3

    0.79

    $                     2,540.26

    4

    3,000

    1/ (1+0.08)^4

    0.74

    $                     2,205.09

    5

    3,000

    1/ (1+0.08)^5

    0.68

    $                     2,041.75

    Total

    $                   12,493.55

    Less : initial investment

    $                     9,500.00

    Net present value

    $                     2,993.55

    benefit cost ratio

    1.32

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