clastic IlI. Application and Analysis (19 points). 1. You have been hired by the
ID: 2601241 • Letter: C
Question
clastic IlI. Application and Analysis (19 points). 1. You have been hired by the Fisheries Departm to do a CBA of the Squid Are Valuable (SA V) proposal. It will take a year to acquire a BN2 ent of the Govenment of the Falkland Islands er aircraft and train pilots on how to use it to monitor and protect the Falkland Island's valuable population of squid. The cost to do so will be $750,000. Thereafter, SAV will yield benefits of $75,000 each year for five years. At the end of the fifth year, the BN2 Defender aircraft will be sold for $300,000. Calculate the NPV of SAV assuming a discount rate of 4%. Use conversion factors when making your calculation. (The conversion factors table is at the end of the exam.) (4 points).Explanation / Answer
Cost = $750,000 after 1 year , Cash flows = $75,000 for next 5 years, Terminal value = $300,000 after total 6 years
PV of cash flows = 75,000 (PVAF @ 4% for 5 years) + (75,000 + 300,000) * PVF (4% for 6years)
= 75,000 * 4.452 + 375,000 * 0.790 = 333,900 + 296,250 = $630,150
PV of cash outflow = 750,000 * PVF (4% for 1 year) = 750,000 * 0.962 = $721,500
NPV = PV of cash inflows - PV of cash outflows = 630,150 - 721,500 = ($91,350)
NPV = 580,500 - 750,000 = ($169,500)
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