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Perform a financial analysis for a project using the format provided in the book. Assume the projected costs and benefits for this project are spread over four years as follows: Estimated costs are $100,000 in Year 1 and 525.000 each year in Years 2, 3, and 4. (Hint: Just change the years in the template file from 0, 1, 2, 3, and 4 to 1, 2, 3, and 4. The discount factors will automatically be recalculated.) Estimated benefits are 50 in Year 1 and 580,000 each year in Years 2, 3, and 4. Use an 8% discount rate. Use the business case financials template provided on the companion Web site to calculate and clearly display the NPV, ROI, and year in which payback occurs. In addition, write a paragraph explaining whether you would recommend Investing in this project based on your financial analysis.

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Tundexi

Answer:

                   A             B               C            D              E      

Year 1     100000         0         0.925     92500        0  

Year 2    25000     80000     0.857     21425      68560  

Year 3    25000     80000     0.793     19825      63440  

Year 4    25000     80000     0.735      18375      58800  

Total                                                      152,125 190,800

Cost of the project = A, Benefits = B, Discount Factor at 8% = C, NPV of Outflows = D, NPV of Inflows = E

1. Financial Analysis using NPV

Net present value of the Cost and Benefits  = NPV of Inflows - NPV of Outflows

NPV = $190,800 - $152,125

NPV = $38,675

Conclusion: NPV is positive hence the project should be accepted

2. ROI = The Earnings / Cost of investment made.

ROI = 240,000 /  175,000

ROI = 1.371429

ROI = 137.14%

3. Payback Period

                   A                B            C               D

Year 1      100000   100000       0                0  

Year 2     25000     125000    80000     80000  

Year 3     25000     150000    80000     160000  

Year 4     25000     175000     80000    240000  

Cost of the project = A, Cumulative Cost = B, Benefits = C, Cumulative benefits = D

Here, it is apparent that cost in project is achieved in the Year 3 itself but, $25,000 invested every year, so that cost need to be recovered from the cost. Incremental cost is $25,000 but incremental earning required is Only $175,000 - $160,000 = 15000$.

So, Year 4, $80,000 is earned in 12 months, then $15,000 in how many months, require

So, accordingly 12 * $15,000 / $80,000 = 2.25 Months.    

Pay back period is 3 years and 2.25 months    

Hence, it is advisable to take up the project.  

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