Question

1.
Assume you need to evaluate an ecotouristic project. Each year the project requires maintenance costs equal to $200 and you have benefits (income) of $500. Except for the first year when you invest $1,000 and you have zero income. The market interest rate is 5% What is the Net Present Value of this project? YEAR 1 INTEREST RATE 5% COSTS BENEFITS 1000 10 200 500 200 500 500 200 500 200
2.

Answer 1

Q1.

Given,

(Note that costs are negative flows and benefits are positive flows)

Net cash flow in year 1 = -$1,000

Net cash flows in years 2 through 5 = -$200 + $500 = $300

Market Interest rate = 5% per year

From the compound interest table, we obtain

(P/F, 5%, 1) = 0.9524

(P/A, 5%, 4) = 3.546

Net Present Value of the above cash flow = Net Cash flow in year 1 x (P/F, 5%, 1) + Net cash flow in year 2 through 5 x (P/A, 5%, 4) x (P/F, 5%, 1) = -$1,000 x 0.9524 + $300 x 3.546 x 0.9524 = -$952.4 + $1,013.2 = $60.8

Ans: $60.8

Q2.

Net cash flow in year 1 = -$800

Net cash flows in years 2 through 5 = -$250 + $500 = $250

Net Present Value of the above cash flow = Net Cash flow in year 1 x (P/F, 5%, 1) + Net cash flow in year 2 through 5 x (P/A, 5%, 4) x (P/F, 5%, 1) =-$800 x 0.9524 + $250 x 3.546 x 0.9524 = -$761.92 + $844.30 = $82.38

Ans: $82.38