An investment of ₹1,05,815.4 can be made in a project that will produce a uniform annual revenue of ₹53,000 for 5 years and then have a salvage value of ₹30,000. Annual disbursements will be ₹30,000 each year for operation and maintenance costs. The company’s minimum attractive rate of return is

Question

An investment of ₹1,05,815.4 can be made in a project that will produce a uniform annual revenue of ₹53,000 for 5 years and then have a salvage value of ₹30,000. Annual disbursements will be ₹30,000 each year for operation and maintenance costs. The company’s minimum attractive rate of return is [latex]10\%[/latex]. Show whether this is a desirable investment by using the present worth method.

Accepted Answer

Step 1: The cash flow diagram for this problem is shown in Fig. 5.2.

Step 2: The P.W. of the series of cash receipts is computed as:

[latex]P.W.=₹53,000\left(P/A,10\% ,5\right)+₹30,000\left(P/F,10\% ,5\right)[/latex]

[latex]=₹53,000\left(3.7908\right)+₹30,000\left(0.6209\right)[/latex]

[latex]P.W.=₹2,19,539.4[/latex]

Step 3: The P.W. of the series of cash disbursements is computed as:

[latex]P.W.=₹1,05,815.4+₹30,000\left(P/A,10\% ,5\right)[/latex]

[latex]=₹1,05,815.4+₹30,000\left(3.7908\right)[/latex]

[latex]P.W.=₹2,19,539.4[/latex]

Step 4: [latex]N.P.W.=₹2,19,539.4-₹2,19,539.4[/latex]

[latex]N.P.W.= 0[/latex]

Since, N.P.W. = 0, the project is shown to be barely justified.

Question 5.2: An investment of ₹1,05,815.4 can be made in a project that w...

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