Question

Mazoon Electric Company is responsible for supplying and upkeep of the distribution of electric power in South Al Batinah region. The company is planning to upgrade the distribution system which will reduce line losses, failure occurrences and increased revenue. This up gradation will cost the company OMR 250,000. Information on the expected revenues and costs for coming years is tabulated below:

Year Ending	Expected revenue (OMR)	Expected Annual Costs (OMR)
2020	75000	8000
2021	90000	10000
2022	110000	12000
2023	125000	15000
2024	140000	15000
2025	135000	16000
2026	120000	17000

Assume that annual interest rate is 8% per annum and compounded annually.

a) Draw a cash flow diagram for the information given above.

b) Compute the Net Present Worth of the future cash flows.

c) Compute the Future Worth at the end of 2026 of cash flows.

Answer 1

b)

Year Ending	Expected Revenue	ExpectedAnnual Cost	Upgradation Cost	Net Cash Flow	Discount Factor @ 8%	PV
2020			(2,50,000)		1	(2,50,000)
2020	75,000	(8,000)		67,000	0.926	62,042
2021	90,000	(10,000)		80,000	0.857	68,560
2022	1,10,000	(12,000)		98,000	0.794	77,812
2023	1,25,000	(15,000)		1,10,000	0.735	80,850
2024	1,40,000	(15,000)		1,25,000	0.681	85,125
2025	1,35,000	(16,000)		1,19,000	0.631	75,089
2026	1,20,000	(17,000)		1,03,000	0.583	60,049
				NPV	2,59,527

C)

							(1.08)^Period
Year Ending	Expected Revenue	ExpectedAnnual Cost	Upgradation Cost	Net Cash Flow	Period	Compunded Cash Flow	Interest earned/lost @ 8%	Furture Worth
2020			(2,50,000)		0	(2,50,000)	1.7138	(4,28,456.067)
2020	75,000	(8,000)		67,000	1	(1,83,000)	1.5869	(2,90,398.001)
2021	90,000	(10,000)		80,000	2	(1,03,000)	1.4693	(1,51,340.792)
2022	1,10,000	(12,000)		98,000	3	(5,000)	1.3605	(6,802.445)
2023	1,25,000	(15,000)		1,10,000	4	1,05,000	1.2597	1,32,269.760
2024	1,40,000	(15,000)		1,25,000	5	2,30,000	1.1664	2,68,272.000
2025	1,35,000	(16,000)		1,19,000	6	3,49,000	1.0800	3,76,920.000
2026	1,20,000	(17,000)		1,03,000	7	4,52,000	1.0000	4,52,000.000
								3,52,464.45