a) Calculate the dynamic payback period for the project A b) Calculate the return on investment...

a) Calculate the dynamic payback period for the project A

b) Calculate the return on investment of the project A

c) Determine the appropriate selling price which will ensure the NPV of project A and B are the same

d) Determine if the NPV of the project A is more sensitive to interest rate than the selling price. Use appropriate diagrams and appropriate parameter

Parameter	Project A	Project B
Project lifetime years	20	20
Real interest rate	10%	10%
Investment expenditure	25 000	50 000
Linear depreciation of plant	5% per annum	1% per annum
Total operating costs	5 000	2 500
Energy units supplied	20 000 per annum	20 000 per annum
Tariff (unit selling price)	.50	?

Expert Solution

a)

Year	Investment	Revenue	Costs	Net cashflow	Cumulative
0	$ (25,000)			$ (25,000)
1		$ 10,000	$ 6,250	$ 3,750	$ 3,750
2		$ 10,000	$ 6,250	$ 3,750	$ 7,500
3		$ 10,000	$ 6,250	$ 3,750	$ 11,250
4		$ 10,000	$ 6,250	$ 3,750	$ 15,000
5		$ 10,000	$ 6,250	$ 3,750	$ 18,750
6		$ 10,000	$ 6,250	$ 3,750	$ 22,500
7		$ 10,000	$ 6,250	$ 3,750	$ 26,250
8		$ 10,000	$ 6,250	$ 3,750	$ 30,000
9		$ 10,000	$ 6,250	$ 3,750	$ 33,750
10		$ 10,000	$ 6,250	$ 3,750	$ 37,500
11		$ 10,000	$ 6,250	$ 3,750	$ 41,250
12		$ 10,000	$ 6,250	$ 3,750	$ 45,000
13		$ 10,000	$ 6,250	$ 3,750	$ 48,750
14		$ 10,000	$ 6,250	$ 3,750	$ 52,500
15		$ 10,000	$ 6,250	$ 3,750	$ 56,250
16		$ 10,000	$ 6,250	$ 3,750	$ 60,000
17		$ 10,000	$ 6,250	$ 3,750	$ 63,750
18		$ 10,000	$ 6,250	$ 3,750	$ 67,500
19		$ 10,000	$ 6,250	$ 3,750	$ 71,250
20		$ 10,000	$ 6,250	$ 3,750	$ 75,000

The investment is recovered after the 6th year and before 7th year, to find out the exact time we can use the formula

(cumulative cashfow-initial investment)/cashfow per period

=(26,250-25,000)/3,750 =0.33 years or 4 months

Therefore payback is 6years and 4 months

,b) Total net cashflow is $75,000, Initial investment = $25,000

Therefore ROI = 75,000/25,000 = 3 times

c) Selling price for B should be $0.36

d) Project A is more sensitive to Price change that interest rate, below are the calculations by reducing the selling price and interest rate by 20%

Year	Investment	Revenue	Costs	Net cashflow	Cumulative	Discounting factor	Discounted cashflow
0	$ (25,000)			$ (25,000)	$ (25,000)	1.000	$ (25,000)
1		$ 8,000	$ 6,250	$ 1,750	$ 1,750	0.909	$ 1,591
2		$ 8,000	$ 6,250	$ 1,750	$ 3,500	0.826	$ 2,893
3		$ 8,000	$ 6,250	$ 1,750	$ 5,250	0.751	$ 3,944
4		$ 8,000	$ 6,250	$ 1,750	$ 7,000	0.683	$ 4,781
5		$ 8,000	$ 6,250	$ 1,750	$ 8,750	0.621	$ 5,433
6		$ 8,000	$ 6,250	$ 1,750	$ 10,500	0.564	$ 5,927
7		$ 8,000	$ 6,250	$ 1,750	$ 12,250	0.513	$ 6,286
8		$ 8,000	$ 6,250	$ 1,750	$ 14,000	0.467	$ 6,531
9		$ 8,000	$ 6,250	$ 1,750	$ 15,750	0.424	$ 6,680
10		$ 8,000	$ 6,250	$ 1,750	$ 17,500	0.386	$ 6,747
11		$ 8,000	$ 6,250	$ 1,750	$ 19,250	0.350	$ 6,747
12		$ 8,000	$ 6,250	$ 1,750	$ 21,000	0.319	$ 6,691
13		$ 8,000	$ 6,250	$ 1,750	$ 22,750	0.290	$ 6,590
14		$ 8,000	$ 6,250	$ 1,750	$ 24,500	0.263	$ 6,452
15		$ 8,000	$ 6,250	$ 1,750	$ 26,250	0.239	$ 6,284
16		$ 8,000	$ 6,250	$ 1,750	$ 28,000	0.218	$ 6,094
17		$ 8,000	$ 6,250	$ 1,750	$ 29,750	0.198	$ 5,886
18		$ 8,000	$ 6,250	$ 1,750	$ 31,500	0.180	$ 5,666
19		$ 8,000	$ 6,250	$ 1,750	$ 33,250	0.164	$ 5,437
20		$ 8,000	$ 6,250	$ 1,750	$ 35,000	0.149	$ 5,203
	NPV						$ 86,861

Year	Investment	Revenue	Costs	Net cashflow	Cumulative	Discounting factor	Discounted cashflow
0	$ (25,000)			$ (25,000)	$ (25,000)	1.000	$ (25,000)
1		$ 10,000	$ 6,250	$ 3,750	$ 3,750	0.926	$ 3,472
2		$ 10,000	$ 6,250	$ 3,750	$ 7,500	0.857	$ 6,430
3		$ 10,000	$ 6,250	$ 3,750	$ 11,250	0.794	$ 8,931
4		$ 10,000	$ 6,250	$ 3,750	$ 15,000	0.735	$ 11,025
5		$ 10,000	$ 6,250	$ 3,750	$ 18,750	0.681	$ 12,761
6		$ 10,000	$ 6,250	$ 3,750	$ 22,500	0.630	$ 14,179
7		$ 10,000	$ 6,250	$ 3,750	$ 26,250	0.583	$ 15,317
8		$ 10,000	$ 6,250	$ 3,750	$ 30,000	0.540	$ 16,208
9		$ 10,000	$ 6,250	$ 3,750	$ 33,750	0.500	$ 16,883
10		$ 10,000	$ 6,250	$ 3,750	$ 37,500	0.463	$ 17,370
11		$ 10,000	$ 6,250	$ 3,750	$ 41,250	0.429	$ 17,691
12		$ 10,000	$ 6,250	$ 3,750	$ 45,000	0.397	$ 17,870
13		$ 10,000	$ 6,250	$ 3,750	$ 48,750	0.368	$ 17,925
14		$ 10,000	$ 6,250	$ 3,750	$ 52,500	0.340	$ 17,874
15		$ 10,000	$ 6,250	$ 3,750	$ 56,250	0.315	$ 17,732
16		$ 10,000	$ 6,250	$ 3,750	$ 60,000	0.292	$ 17,513
17		$ 10,000	$ 6,250	$ 3,750	$ 63,750	0.270	$ 17,230
18		$ 10,000	$ 6,250	$ 3,750	$ 67,500	0.250	$ 16,892
19		$ 10,000	$ 6,250	$ 3,750	$ 71,250	0.232	$ 16,509
20		$ 10,000	$ 6,250	$ 3,750	$ 75,000	0.215	$ 16,091
	NPV						$ 270,905

jeff jeffy answered 1 year ago

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