Homework Answers
Expected cost is given
Now = 5,000
Year ONE = 6,000
Year TWO = 5,000
Expected Revenues are given
Year FIVE = 7,000
Year SEVEN = 6,000
Year TEN = 8,000
Discount Rate = 5%
a. NPV
NPV = -5,000 – 6,000 (P/F, 5%, 1) – 5,000 (P/F, 5%, 2) + 7,000 (P/F, 5%, 5) + 6,000 (P/F, 5%, 7) + 8,000 (P/F, 5%, 10)
NPV = -5,000 – 6,000 (0.95238) – 5,000 (0.90703) + 7,000 (0.78353) + 6,000 (0.71068) + 8,000 (0.61391)
NPV = -589.36
b. B/C Ratio (using PW Method)
B/C Ratio = PW of Benefits ÷ PW of Costs
B/C Ratio = [7,000 (P/F, 5%, 5) + 6,000 (P/F, 5%, 7) + 8,000 (P/F, 5%, 10)] ÷ [5,000 + 6,000 (P/F, 5%, 1) + 5,000 (P/F, 5%, 2)]
B/C Ratio = [7,000 (0.78353) + 6,000 (0.71068) + 8,000 (0.61391)] ÷ [5,000 + 6,000 (0.95238) + 5,000 (0.90703)]
B/C Ratio = 14,660.07 ÷ 15249.43 = 0.96
c. The Project is not worth taking.
The NPV is negative and the B/C Ratio is less than One. Hence, reject the project.
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