Question

Part 1
1. Calculate the NPV for the following Investment A, assuming an annual discount rate of 10%.

C=10,000	C=8,000	C=6,000	I=7,500	I=7,500	...	I=7,500	L=10,000
0	1	2	3	4	...	10

C: Cost, I:Income, L: Salvage value

Part 2
2. Calculate the Benefit-Cost Ratio for the following Investment B, assuming an annual discount rate of 14%.

C=10,000	C=8,000	C=6,000	I=7,500	I=7,500	...	I=7,500	L=10,000
0	1	2	3	4	...	10

C: Cost, I:Income, L: Salvage value

Answer 1

1.

Using NPV calculation,

$NPV = - Initial Investment + \sum_{t=1}^{n} C_{t}/(1+r)^t$

NPV = $14,691.75

2.

Benefit Cost Ratio = Discount Value of Benefit/Discounted value of Costs

$Discounted Value = \sum_{t=1}^{n} C_{t}/(1+r)^t$

Discounted value of Costs = $21,634.35

Discounted Value of Benefits = $29,468.35

Benefit Cost Ratio = 29468.35/21634.35

Discounted Value of Benefits = $29,468.35

Benefit Cost Ratio = 1.36