Answer to Question #188256 in Financial Math for Inara Shah

Question

A project, that consists of just readjusting some parts to adapt them to assemble to electric cars, would produce net revenues of $200,000 per year, for 10 years. Assuming that these revenues will grow at a constant 1% per year, and are assessed at a cost of capital of 4%:

 

 

a)     Would it still be profitable if it required an initial investment of $1,500,000?

 

b)     If we take these annual revenues of $200,000 growing at a 1% per year, and we invest them in a bank account that offers an annual rate of 5% for 10 years, how much will we have at the end?

Answer 1

Given;

annual revenues=$200000

Term=10 years

cost of capital=4%

growth rate = 1%

(a)

NPV=$191,712.48

Since the NPV is positive, it is profitable

(b)

Annual savings =200000 which is expected to grow at 1% per year

Deposit after 10 years = $ 2,621,362.51