Final answer:
To answer the student's question, you need to calculate the NPV, BC ratio, and IRR for a project with specific initial investment, operating costs, revenue, lifespan, and discount rate. These calculations are similar to calculating the present value of future cash flows from a bond using the present value formulas and adjusting for changes in the discount rate.
Step-by-step explanation:
The student's question involves a project with an initial investment of $100,000, an annual operating cost of $10,000, annual revenue of $30,000, a project lifespan of 25 years, and a discount rate of 8%. To calculate the Net Present Value (NPV), the Benefit-Cost (BC) ratio, and the Internal Rate of Return (IRR), we need to discount the net cash flows for the life of the project at the given discount rate and then apply the formulas for these financial criteria.
To calculate the NPV, we subtract the initial investment from the sum of the present values of annual net cash flows (revenue minus operating cost) over the 25 years. The BC ratio is calculated by dividing the sum of the present values of the net annual cash flows by the initial investment. The IRR is found by identifying the discount rate that would make the NPV equal to zero.
Using the example of the two-year bond with a similar approach, for an issued bond of $3,000 at an interest rate of 8%, the bond pays $240 annually in interest. The present value of these payments (interest plus principle repayment in the last year) is calculated at 8% and then at 11% if interest rates rise. The calculations apply the present value formulas, which show how the bond's value decreases with the higher discount rate.