Question

Perform a financial analysis for a project using the format provided in the book. Assume the projected costs and benefits for this project are spread over four years as follows: Estimated costs are $100,000 in Year 1 and 525.000 each year in Years 2, 3, and 4. (Hint: Just change the years in the template file from 0, 1, 2, 3, and 4 to 1, 2, 3, and 4. The discount factors will automatically be recalculated.) Estimated benefits are 50 in Year 1 and 580,000 each year in Years 2, 3, and 4. Use an 8% discount rate. Use the business case financials template provided on the companion Web site to calculate and clearly display the NPV, ROI, and year in which payback occurs. In addition, write a paragraph explaining whether you would recommend Investing in this project based on your financial analysis.

Answer 1

A B C D E

Year 1 100000 0 0.925 92500 0

Year 2 25000 80000 0.857 21425 68560

Year 3 25000 80000 0.793 19825 63440

Year 4 25000 80000 0.735 18375 58800

Total 152,125 190,800

Cost of the project = A, Benefits = B, Discount Factor at 8% = C, NPV of Outflows = D, NPV of Inflows = E

1. Financial Analysis using NPV

Net present value of the Cost and Benefits = NPV of Inflows - NPV of Outflows

NPV = $190,800 - $152,125

NPV = $38,675

Conclusion: NPV is positive hence the project should be accepted

2. ROI = The Earnings / Cost of investment made.

ROI = 240,000 / 175,000

ROI = 1.371429

ROI = 137.14%

3. Payback Period

A B C D

Year 1 100000 100000 0 0

Year 2 25000 125000 80000 80000

Year 3 25000 150000 80000 160000

Year 4 25000 175000 80000 240000

Cost of the project = A, Cumulative Cost = B, Benefits = C, Cumulative benefits = D

Here, it is apparent that cost in project is achieved in the Year 3 itself but, $25,000 invested every year, so that cost need to be recovered from the cost. Incremental cost is $25,000 but incremental earning required is Only $175,000 - $160,000 = 15000$.

So, Year 4, $80,000 is earned in 12 months, then $15,000 in how many months, require

So, accordingly 12 * $15,000 / $80,000 = 2.25 Months.

Pay back period is 3 years and 2.25 months

Hence, it is advisable to take up the project.