solving an economics question
ANSWER
We must determine each investment choice’s Net Present Value (NPV) to assess these investment offers. The original investment, ongoing costs, yearly cash flows, and the discount rate are all factored into the NPV. The NPV calculation formula is as follows:
NPV=CF1(1+r)1+CF2(1+r)2+…+CFn(1+r)n-Initial Investment n-O&M CostsNPV=(1+r)1CF1+(1+r)2CF2+…+(1+r)nCFn−InitialInvestment−O&MCosts
Where:
CFiCFi symbolizes the year’s cash flow. The discount rate is ii rr, and nn is the years.
Using the given information, let us determine the NPV for each of the three proposals:
Proposition 1
$3,500,000 was put up front.
O&M Cost: $62,000 annually
Annual Cash Flow: $920,000
The years are n=nan=na.
r=12.5%r=12.5% is the discount rate.
NPV = 920,000(1+0.125)1+920,000(1+0.125)2+…+920,000(1+0.125)na−3,500,000−62,000×(1−(1+0.125)−na0.125)(1+0.125)1920,000+(1+0.125)2920,000+…+(1+0.125)na920,000−3,500,000−62,000×(0.1251−(1+0.125)−na)
Option 2:
Initial Investing: O&M $2,700,000 Cost: $83,000 annually
Annual Cash Flow: $830,000
Years: n = nb n = n
Discount Ratio: r = 11%
NPV = 830,000(1+0.11)1+830,000(1+0.11)2+…+830,000(1+0.11)nb−2,700,000−83,000×(1−(1+0.11)−nb0.11)(1+0.11)1830,000+(1+0.11)2830,000+…+(1+0.11)nb830,000−2,700,000−83,000×(0.111−(1+0.11)−nb)
Option 3:
Initial Investing: O&M $1,900,000 Cost: $91,000 annually
(First Year) Cash Flow: $220,000
Cash Flow Growth: $60,000.
Years: n = nc n= nc
r=14%r=14% is the discount rate.
NPV = 220,000(1+0.14)1+280,000(1+0.14)2+…+(220,000+60,000×(nc−1))(1+0.14)nc−1,900,000−91,000×(1−(1+0.14)−nc0.14)(1+0.14)1220,000+(1+0.14)2280,000+…+(1+0.14)nc(220,000+60,000×(nc−1))−1,900,000−91,000×(0.141−(1+0.14)−nc)
Find the proposal with the highest NPV by calculating the NPV for each one and comparing the results. A greater NPV suggests a more advantageous investment option since it shows that the predicted future cash flows are worth more now than the initial investment and operating expenses. When selecting your choice, be sure to take into account both the size of the NPV and the accompanying costs.
QUESTION
Description
Investor group offered three proposals
- To invest $3,500,000 on this product with annual O&M of $62,000 starting end of year one. The proposal is expected to result in annual benefit in cash flow of $920,000 over na years period with interest rate of 12.5 %.
- To invest $2,700,000 on this product with annual O&M of $83,000 starting end of year one. The proposal is expected to result in annual benefit in cash flow of $830,000 over nb years period with interest rate of 11 %.
- To invest $1,900,000 on this product with annual O&M of $91,000 starting end of year one. The proposal is expected to result in benefit in cash flow of $220,000 first year, which increases by $60,000 yearly over nc years period with interest rate of 14 %.
Fill in the order form and submit all your files, including instructions, rubrics, and other information given to you by your instructor.
Once you complete filling the forms, complete your payment. We will get the order and assign it to a writer.
When your order is completed, it’s assigned to an editor for approval. The editor approves the order.
Once approved, we will upload the order to your account for you to download. You can rate your writer or give your customer review.
