Question

A company is considering investing in a project. The project requires an initial investment of three payments, each of RM105,000. The first is due at the start of the project, the second six months later, and the third payment is due one year after the start of the project. After 15 years, it is assumed that a major refurbishment of the infrastructure will be required, costing RM200,000. The project is expected to provide a continuous income stream as follows: • RM20,000 in the second year • RM23,000 in the third year • RM26,000 in the fourth year • RM29,000 in the fifth year Thereafter the continuous income stream is expected to increase by 3% per annum (compound) at the start of each year. The income stream is expected to cease at the end of the 30th year from the start of the project. Find the net present value of the project at a rate of interest of 8% per annum effective to the nearest RM1,000).

Answer 1

Year	Particular	Cash Flow (RM)	Discount Factor 8%	Discounted cash Flow RM
0	Initial Investment -2*105000	-210000	1	-210000
1	Initial Investment	-105000	0.926	-97222
2	Income	20000	0.857	17147
3	Income	23000	0.794	18258
4	Income	26000	0.735	19111
5	Income	29000	0.681	19737
6	Income (increasing at 3%)	29870	0.630	18823
7	Income (increasing at 3%)	30766	0.583	17952
8	Income (increasing at 3%)	31689	0.540	17121
9	Income (increasing at 3%)	32640	0.500	16328
10	Income (increasing at 3%)	33619	0.463	15572
10	Income (increasing at 3%)	34628	0.463	16039
11	Income (increasing at 3%)	35666	0.429	15297
12	Income (increasing at 3%)	36736	0.397	14589
13	Income (increasing at 3%)	37838	0.368	13913
14	Income (increasing at 3%)	38974	0.340	13269
15	Income (increasing at 3%)	40143	0.315	12655
15	Major Refurbishment Cost	-200000	0.315	-63048
16	Income (increasing at 3%)	41347	0.292	12069
17	Income (increasing at 3%)	42587	0.270	11510
18	Income (increasing at 3%)	43865	0.250	10977
19	Income (increasing at 3%)	45181	0.232	10469
20	Income (increasing at 3%)	46536	0.215	9984
21	Income (increasing at 3%)	47933	0.199	9522
22	Income (increasing at 3%)	49371	0.184	9081
23	Income (increasing at 3%)	50852	0.170	8661
24	Income (increasing at 3%)	52377	0.158	8260
25	Income (increasing at 3%)	53949	0.146	7877
26	Income (increasing at 3%)	55567	0.135	7513
27	Income (increasing at 3%)	57234	0.125	7165
28	Income (increasing at 3%)	58951	0.116	6833
29	Income (increasing at 3%)	60720	0.107	6517
30	Income (increasing at 3%)	62541	0.099	6215
	NPV			8193

Rounded Off RM 8.193