Question

In: Accounting

1 Assume that a project has a starting cost of $300,000 in year 1. $40,000 each...

1
Assume that a project has a starting cost of $300,000 in year 1. $40,000 each year in Year 2, 3, and 4. Estimated benefits of the project are $0 in Year 1 and $ 120,000 each year in Year 2, 3, and 4. Use a discount rate of 7% and round the discount rate into two decimal points.

Calculate the NPV for this project.
calculate the project ROI.

Solutions

Expert Solution

Caluclation of the NPV of the Project;

I II III = I+II IV V = III*IV
Year Cash out flow Cash in flow Net amount PVF @ 7% Present Value  
1           -3,00,000                   -   -3,00,000                    0.94 -2,82,000
2               -40,000      1,20,000        80,000                    0.87        69,600
3               -40,000      1,20,000        80,000                    0.82        65,600
4               -40,000      1,20,000        80,000                    0.76        60,800
NPV Of the Project      -86,000

ROI = (Return-Investment) / Investment

I II III IV = I * II V = I * III
Year PVF @ 7% Cash out flow Cash in flow Investment Return
1                     0.94      3,00,000                 -             2,82,000                 -  
2                     0.87         40,000    1,20,000               34,800    1,04,400
3                     0.82         40,000    1,20,000               32,800        98,400
4                     0.76         40,000    1,20,000               30,400        91,200
          3,80,000    2,94,000

ROI = (294000-380000) / 380000 = -22.63%


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