Question

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?

Please use the formula not the excel sheet.

Answer 1

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 6^th 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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