Question

Since you are a mechanical Engineer, suppose that you decided to establish a Typical Automobile maintenance center:

Any missing information please suggest it from your own

the following data is an assumption from me.

for more info I will add the original question below (but please neglect it)

The project life considered to be 10 years since the automobiles lifecycle is around 10 years and after the 10 years all the equipment of the maintenance center should be updated (new update project needed)

#	Type of expense	Amount
1	Establishment cost	100,000$
2	Premises rent	40,000$
3	Operation cost	15,285$
4	Maintenance for equipment cost	3,500$
5	Salaries	68,571$
6	Administration cost (Tax, Registration, …etc)	10,000$
7	Overhead	7,000$

The total cost of the project will be 244,356$

100,000$ will be the initial cost payed once at the beginning of the project (year 0)

The other costs will be 144,356$ paid annually along the project life cycle

The other costs is expected to increase by 2% annually

The e expected revenue for the project is 170,340$ annually and expected to increase by 3% annually since the automobiles will need more repairs when it becomes older

The salvage value for the project will be 20,000$

If needed suggest according to your mind a reasonable interest rate, discounted interest rate, or any other variables.

1. Calculate the Rate of return for the project

show your work in details

the original question as follow (neglect it):

Imagine that you own (250,000$) and you want to invest it in your dream plan. You have to consider two different alternatives. For each alternative, estimate the initial cost and annual cash flow details (operation and maintenance costs, raw material, salaries, overheads…etc.). Then compare these alternatives based on ROR criteria.

Note: you don’t need to consume the 250,000$, any cheaper investments are fine. Any larger investment is allowable under loan consideration or suitable explanation.

Answer 1

Calculation of Rate of return for the project:-

(i) First we need to calculate profit for the year for 10 years of the Project Life (working note -1)

Year	Total Revenue (a)	Total Cost (b)	Profit (a - b) (Net cash Inflow)
1	170340	144356	25984
2	175450(3% Increase)	147243(2% Increase)	28207
3	180714(3% Increase)	150188(2% Increase)	30526
4	186135(3% Increase)	153192(2% Increase)	32943
5	191719(3% Increase)	156255(2% Increase)	35464
6	197470(3% Increase)	159381(2% Increase)	38089
7	203395(3% Increase)	162568(2% Increase)	40827

8	209497(3% Increase)	165820(2% Increase)	43677
9	215781(3% Increase)	169136(2% Increase)	46645
10	222255(3% Increase)	172519(2% Increase)	49736

The second step is to calculate the present value of cash inflow & outflow based on two discounting rates assuming to be 10% & 14%.

Year	Net Cashflow (See W.note-1) (A)	Present Value Factor @ 10% (B)	Present Value (A* B)	Present value factor @ 14% (C)	Present Value (A* C)
0	(1,00,000)	1	(1,00,000)	1	(1,00,000)
1	25984	0.909	23619	0.877	22788
2	28207	0.826	23299	0.769	21691
3	30526	0.751	22925	0.675	20605
4	32943	0.680	22401	0.592	19502
5	35464	0.621	22023	0.519	18406
6	38089	0.564	21482	0.455	17330

7	40827	0.513	20944	0.399	16290
8	43677	0.466	20353	0.350	15287
9	46645	0.424	19777	0.307	14320
10	49736	0.385	19148	0.270	13429
10	20,000(Salvage Value)	0.385	7700	0.270	5400
	TOTAL (Net Present Value)		1,23,671		85048

By using Interpolating technique we can find out Rate of return for the project:-

IRR (Rate of return of project) = Lower Rate + NPV of lower rate *(Higher Rate - Lower Rate)

(NPV of lower rate - NPV of higher rate )   

Here, Lower rate = 10%   

NPV of lower rate = $ 1,23,671   

NPV of higher rate = $ 85,048

Higher Rate = 14%

So, IRR ( rate of return of project by using above formula)= 10%+(123671/38623)*(14%-10%)

= 10% + 12.8% = 22.8% Answer