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    Sara
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    The document summarizes the net present value (NPV) and benefit-cost ratio calculations for a project with a total capital cost of Rs. 3000 and annual benefits of Rs. 1200 for 5 years, with recurring annual costs of Rs. 200. At a 10% discount rate, the NPV is Rs. 718 and benefit-cost ratio is 1.26. At a 5% discount rate, the NPV is Rs. 1267 and benefit-cost ratio is 1.44, so the document recommends using a 5% discount rate since it yields higher NPV and benefit-cost ratio.

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    The document summarizes the net present value (NPV) and benefit-cost ratio calculations for a project with a total capital cost of Rs. 3000 and annual benefits of Rs. 1200 for 5 years, with recurring annual costs of Rs. 200. At a 10% discount rate, the NPV is Rs. 718 and benefit-cost ratio is 1.26. At a 5% discount rate, the NPV is Rs. 1267 and benefit-cost ratio is 1.44, so the document recommends using a 5% discount rate since it yields higher NPV and benefit-cost ratio.

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    9 views2 pages

    Numerical Solution

    Uploaded by

    Sara
    The document summarizes the net present value (NPV) and benefit-cost ratio calculations for a project with a total capital cost of Rs. 3000 and annual benefits of Rs. 1200 for 5 years, with recurring annual costs of Rs. 200. At a 10% discount rate, the NPV is Rs. 718 and benefit-cost ratio is 1.26. At a 5% discount rate, the NPV is Rs. 1267 and benefit-cost ratio is 1.44, so the document recommends using a 5% discount rate since it yields higher NPV and benefit-cost ratio.

    Copyright:

    © All Rights Reserved
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    of 2

    Solution:

    Total Capital Cost of the Project (Completion after 1 Year) = Rs. 3000

    2nd – 6th Year (5 Year Life):

    Benefits Per Year = 1200

    Less: Recurring Cost per year = (200)

    Net Cash Inflows = 1000

    NPV @10%:

    (3000) 1000 1000 1000 1000 1000


    = + 2 + 3
    + 4
    + 5
    + 6
    1.10 1.10 1.10 1.10 1.1 0 1.1 0

    = (2727) + 826 + 751 + 683 + 621 + 564

    = (2727) + 3445

    = Rs. 718

    NPV @5%:

    (3000) 1000 1000 + 1000 + 1000 + 1000


    = + 2 + 3 4 5 6
    1.05 1.05 1.05 1.05 1. 05 1. 05

    = (2857) + 907 + 864 + 823 + 784 + 746

    = (2857) + 4124

    = Rs. 1267

    Benefit-Cost Ratio, if 10% Discount Rate:

    3445
    = = 1.26
    2727

    Benefit-Cost Ratio, if 5% Discount Rate:

    4124
    = = 1.44
    2857

     Since, at 5% NPV at Benefit Cost Ratio is higher than 10%, therefore, the government should
    undertake 5% Discount rate.

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