Question

An investor is considering investing in a capital project. The project

requires an outlay of £500,000 at outset and further payments at the end

of each of the first 5 years, the first payment being £100,000 and each

successive payment increasing by £10,000.The project is expected to provide a continuous income at a rate of

£80,000 in the first year, £83,200 in the second year, and so on, with

income increasing each year by 4% per annum compound. The income is

received for 25 years.

It is assumed that, at the end of 15 years, a further investment of

£300,000 will be required and that the project can be sold to another

investor for £700,000 at the end of 25 years.

(a) Calculate the net present value of the project at a rate of interest of

11% per annum effective.

(b) Without doing any further calculations, explain how the net present

value would alter if the interest rate had been greater than 11% per

annum effective.

Answer 1

PLEASE LIKE THE ANSWER IF YOU FIND IT HELPFUL OR YOU CAN COMMENT IF YOU NEED CLARITY / EXPLANATION ON ANY POINT.