Question

1. a) A fisheries firm is considering a proposed cooling facility project with an initial cost of $390,000 and projected revenue (in thousands of $) of successively 100, 200, and 150 in the next 3 years. Show whether the firm should go ahead with the project if the discount rate is 5%. Would you recommend a different decision if the discount rate is 10%?

b) A proposed Aquaculture project cost $870,000 and it’s expected to generate revenue (in thousand $) in the next 4 years of 230, 410, 390, 170. At a discount rate of 7%, is the project worthwhile? What is the Internal Rate of Return of the investment project?

Answer 1

Answer a	we have to compute the net present vlaue
	i	ii	iii	iv	v=ii*iii	vi=ii*iv
	Year	Cash flow	PVIF @ 5%	PVIF @ 10%	present value @ 5%	present value @ 10%
	0	-390000	1.0000	1.0000	$         (390,000.00)	$           (390,000.00)
	1	100000	0.9524	0.9091	$             95,238.10	$               90,909.09
	2	200000	0.9070	0.8264	$           181,405.90	$             165,289.26
	3	150000	0.8638	0.7513	$           129,575.64	$             112,697.22
		NPV			$             16,219.63	$             (21,104.43)
NPV @ 5% discount is positive =	$    16,219.63	Project should be accepted
NPV @ 10% discount is negative =	$ (21,104.43)	Project should be rejected
Ans b)
	i	ii	iii	v=ii*iii
	Year	Cash flow	PVIF @ 7%	present value @ 5%
	0	-870000	1.0000	$(870,000.00)
	1	230000	0.9346	$ 214,953.27
	2	410000	0.8734	$ 358,109.88
	3	390000	0.8163	$ 318,356.17
	4	170000	0.7629	$ 129,692.19
		NPV		$    21,419.32
		Since NPV is positive, therefore yes poject is worth accepting
		IRR =	14.63%