Question

A company has proposed a project that has initial costs of $10 million, on-going costs of $1.8 million per year and on-going benefits of $2.2 million per year. The project's life is 20 years. Assuming all on-going costs and benefits occur at the end of each year and that interest is calculated annually, what is the Net Present Value of the project given a discount rate of 10.0%?

Enter your answer in the box below in units of $.

Answer 1

Calculation of net benefit per year:

Benefit per year – Cost per year

$2,200,000 - $1,800,000

$400,000

Calculation of NPV:

-Initial Cost * Present value factor of $1 at year 0 + Net benefit * Present value annuity factor at 10% for

20 years

(-$10,000,000 * 1) + ($400,000 * 8.514)

-$10,000,000 + $3,405,600

-$6,594,400