Question

Question

Look at the Questions A and B below and answer this:

Can you perform an NPV or AW analysis comparing Questions A and B? If so explain how you would do so, and if not explain what would have to be changed to perform an NPV analysis, and what would need to be changed to perform an AW analysis. Write your entire answer.

Question A

A project you are looking at has an upfront cost of $1,471.01, and a cost in year 6 of $544.19. In exchange, the project has the following returns (income):

• $1,371.09 in the first year, increasing by $105 per year for years 2 and 3. Year 4 has the same return as year 3 (same value), and year 5 has a return that is 5% more than year 4.
• There is no return in year 6, but in year 7 the return is $1,194.00 decreasing by $105 per year till the end of the project.

If the project life is 8 years, and the discount rate is 6% what is the NPV of this project?

Question B

You're looking at doing a project with a 5 year life span. The project involves an upfront cost of $1,207.00, but also has a benefit (immediate) at the same time of $118.72. The project also has another cost in year 4 of $935.78. The return schedule is as follows:

• $1,342.33 on year 1, reducing by $52 per year for years 2 and 3. No return on year 4, and on year 5 a single return of $1,629.95

If your cost of capital is 5%, what is the  the NPV of this project?

Answer 1

Question A
Year	Cash outflow	Cash Inflows	Cash Inflow calculation	PVF	Present value outflows	Present value inflows
0	1471.01	0		1	1471.01
1		1371.09		0.943		1293.48
2		1476.09	1371.09+105	0.890		1313.71
3		1581.09	1476.09+105	0.840		1327.51
4		1581.09	Same as year 3	0.792		1252.37
5		1660.14	1581.09+(5%of1581.09)	0.747		1240.56
6	544.19			0.705	383.63
7		1194		0.665		794.08
8		1089	1194-105	0.627		683.25
					1854.64	7904.97
			Net Present value	=	6050.33
Question B
Year	Cash outflow	Cash Inflows	Cash Inflow calculation	PVF	Present value outflows	Present value inflows
0	1207	118.72		1	1207	118.72
1		1342.33		0.952	0	1278.41
2		1290.33	1342.33-52	0.907	0	1170.37
3		1238.33	1290.33-52	0.864	0	1069.72
4	118.72			0.823	97.67	0.00
5		1629.95		0.784	0	1277.11
					1304.67	4914.32
			Net Present value	=	3609.65