What is the present worth of all disbursements and receipts during the life time

Question

What is the present worth of all disbursements and receipts during the life time of the project, evaluated at the beginning of the first year, if the project has the following costs:

Phase 1 labor $2950000 (per year paid at the end of each year)

Phase 1 Material $850000 (paid at the end of the first year only

Phase 2 -years 4 to 10, all costs are paid at the end of each year and include:

Launch $6900000

Insurance $500000

Labor $1950000

Material $640000

The project makes an annual income of $12000000 as a result of sales in phase 2.

Hint: The present value of the net cash flow of phase 2, evaluated at the beginning of first year, must be greater than the sum of the present worth of labor and material costs of phase 1, also evaluated at the beginning of first year. The difference would be the answer to this problem. Make sure to include the sign (-) if the answer is negative.

Remember, if the present worth of all disbursements and receipts is positive, the company will make at least 25% annual return on this investment.

Explanation / Answer

1) Cash flow at the end of yr 1 = 2950000 + 850000 = 3800000 (outflow)
Cash flow at end of yr 2 & 3 = 2950000 (outflow)
Cash flow at end of yrs 4 to 10 = 12000000 - (6900000+500000+1950000+640000) = 2010000 (inflow)

Net cash flow. . . . . . . . . . . . . . .is - 3185208.

The project gives the negative NPV.

Year cash flow pv factor @25% disc cash flow 1 - 3800000 0.8 -3040000 2 - 2950000 0.64 -1888000 3 - 2950000 0.512 -1510400 4-10 2010000 1.6185(annuity) 3253192

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