Question

A proposed project will require the immediate investment of P500,000 and is estimated to have year-end revenues and costs as follows:

Year Revenue (P)   Costs

1 750,000 600,000

2 900,000   770,000

3 1,000,000   750,000

4 950,000   800,000

Is this a good investment? Use the Present Worth Method

Answer 1

The present situation on the cash flow diagram is as follows-

Here arrows above central line shows revenue while below are costs.

Present Worth P = F/(1+i)n where F= future value

i= rate of interest and n= year

Let us assume rate of interest to be 8%.

Thus i=8% = 0.08

All the values have to be converted to present values and then overall revenue > cost for the project to be good investment.

Year (n)	Revenue (2)	Present Worth of Revenue (2)/(1+i)n	Cost (3)	Present Worth of Cost (3)/(1+i)n
0	0	0	500,000	500,000
1	750,000	694,444.44	600,000	555,555.56
2	900,000	771,604.94	770,000	660,150.90
3	1,000,000	793,832.24	750,000	595,374.18
4	950,000	698,278.36	800,000	588,053.88

Thus sum of present worth of revenues= 2,958,159.98

Thus sum of present worth of all costs= 2,899,134.52

Since revenues > cost so this is good investment.