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Considering discount rate of 14%, calculate NPV, Benefit Cost Ratio, and Present Value Ratio for the...

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Finance

Considering discount rate of 14%, calculate NPV, Benefit CostRatio, and Present Value Ratio for the following investment andexplain if it is a good investment.

C=10,000C=8,000C=6,000I=7,500I=7,500...I=7,500L=10,000
01234...10

C: Cost, I:Income, L: Salvage value

Answer & Explanation Solved by verified expert
3.7 Ratings (455 Votes)

Let us look at the table below:

Year CF Discount Factor Discounted CF
0 -10000 1/1.14^0= 1 -10000*1= -10000
1 -8000 1/1.14^1= 0.877193 -8000*0.87719298245614= -7017.54
2 -6000 1/1.14^2= 0.769468 -6000*0.769467528470299= -4616.81
3 7500 1/1.14^3= 0.674972 7500*0.674971516202016= 5062.286
4 7500 1/1.14^4= 0.59208 7500*0.59208027737019= 4440.602
5 7500 1/1.14^5= 0.519369 7500*0.519368664359816= 3895.265
6 7500 1/1.14^6= 0.455587 7500*0.455586547684049= 3416.899
7 7500 1/1.14^7= 0.399637 7500*0.399637322529867= 2997.280
8 7500 1/1.14^8= 0.350559 7500*0.350559054850761= 2629.193
9 7500 1/1.14^9= 0.307508 7500*0.307507942851545= 2306.310
10 7500 1/1.14^10= 0.269744 7500*0.269743809518899= 2023.079
10 10000 1/1.14^10= 0.269744 10000*0.269743809518899= 2697.438
NPV = Sum of all PV 7834.003
Benefits Cost Ratio 1.362109
Present Value Ratio 0.362109
  • As the CF for years 1-3 are costs, they are outflows and therefore negative
  • As the CF for years 4-10 are incomes, they are inflows and therefore positive
  • As the salvage value is an inflow therefore it is positive
  • NPV = Sum of all discounted CF
  • Benefits cost ratio = Sum of Positive discounted CF/Sum of Negative discounted CF
  • Present Value ratio = NPV/Sum of Negative discounted CF
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Transcribed Image Text

Considering discount rate of 14%, calculate NPV, Benefit CostRatio, and Present Value Ratio for the following investment andexplain if it is a good investment.C=10,000C=8,000C=6,000I=7,500I=7,500...I=7,500L=10,00001234...10C: Cost, I:Income, L: Salvage value

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