An investment of $5 500 for a project lasting four years is anticipated to have revenues

  • An investment of $5 500 for a project lasting four years is anticipated to have revenues of $3 000 a year for the first two years and $2 000 a year for the last two years. Costs are $500 for the first year and increase $100 each year for the next two years. There are no costs in the last year. Disposal value is $1 000 atthe end of four years.

Assignment
Draw the cash flow diagram for this investment.
Prepare a graph with the “Y” axis labeled to cover a range from -$6 000 to + $2 000 and label as “Cumulative NPV”. Scale the “X” axis from 0 to 5 years. Label horizontal axis “Year”.

  1. Plot the year by year net “profits” (costs – revenues) on the graph and join the data points. Determine the payback period by determining when the plotted line intersects the $0 horizontal line. What is the time required for the net returns to be zero (revenues = costs)?

Note that this is the Payback Period ignoring the interest rate (i.e., interest rate = 0%).
b. Using an interest rate of 20%, find the Net Present Value (present value of revenues – present value of costs) of the investment after 0, l, 2, 3, and 4 years, (for example, at time 0, the NPV would be-5 500; at time 1 the NPV would be (3 000 – 500) • (1.2or 1 – 5 500 = -$3 417
Plot these on the same graph and join the plotted points.
At what time period does this 20% NPV have a value of $0? Note, this is the Payback period if cost of capital is 20%
c. Repeat part b) using an interest rate of 25%
[The graph you have produced is a RETURN-ON-INVESTMENT graph showing the recovery of the initial investment at various rates of interest. This would be a procedure for determining the Payback Period incorporating an interest rate.]
d. From this procedure, there should be an interest rate which would result in a plotted line to pass through the intersection of $0 NPV and Year 4. This interest rate is the Internal Rate of Return. Estimate what this rate would be from your graph. (i.e., would it be closer to the 20% curve or the 25% curve?).
e.Solve algebraically for the internal rate of return (or use your IRR key on your SHARP calculator) to verify your guess in part d.
SUBMISSION ASSIGNMENT No. 2 (To be completed after Module 2)
A proposal for a new bridge across one of the province’s principal rivers is expected to cost $350 million. The major benefits of this bridge is to reduce traffic congestion on the surrounding bridges and tunnels and to lower accident rates. This bridge will add $14 million per year to the highways department operating costs. The benefits have been estimated to translate into $50.75 million per year in reduction in travel time (projected from estimates of average reduction in travel time per vehicle, cost per hour of averaged vehicle use, and volume of vehicles per year). Furthermore, the insurance corporation estimates that reduced number of accidents will save $3 million a year in insurance claims. a) Determine the Benefit Cost Ratio of this proposalusing: BCR = (Present Value of Benefits – Present Value of Costs)/ Initial Cost of the Investment The evaluation uses an interest rate of 10% and a bridge life of 25 years. ·b) What would be the EUAW for this proposal? c) A deluxe version of the bridge proposal would cost an extra $150 million dollar in initial investment. The operating costs due to more lanes and heavier construction would be an additional $5 million per year. The extra benefits would increase by another $12.5 million annually due to saved travel time and $1 million in reduced accident claims. It would also increase the service life by ten years. Find the EUAW of this deluxe version proposal using a life of 35 years. If the funds were available, would it be economically justified to implement the deluxe version of the bridge proposal?
SUBMISSION ASSIGNMENT No. 3
(To be completed after Module 4)
A contractor is considering the acquisition of a new piece of construction equipment costing $350 000.
The equipment will join other assets in a CCA class with a 30% declining balance rate. The tax rate is 48% and the cost of capital is 15%. Estimates are that the operating cost of the equipment will be $60 000 per year and will increase by 20% per year. Probable salvage value at the end of the first year is $300 000. It will decline by $50 000 each year thereafter reaching $100 000 at the end of the fifth year.
Analyze the proposal by determining the NPV of costs and EUAC for service lives ranging from one to five years.
Determine the economic life of this piece of equipment and calculate the annual equivalent revenue required when operated at this service life.


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