Assume a 30-year life project with an initial capital cost of $250 million, an annual operating cost of $10 million, and constant benefit stream of $50 million per year accruing only after year 10, and having no salvage value at the end of its life. a) Compute the Net Present Value (NPV) of the costs and benefits, and compute the benefit cost ratio (BCR) for a discount rate of 5% and 10%; b) Briefly comment upon the economic feasibility of the project.

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Assume a 30-year life project with an initial capital cost of $250 million, an annual operating cost of $10 million, and constant benefit stream of $50 million per year accruing only after year 10, and having no salvage value at the end of its life. a) Compute the Net Present Value (NPV) of the costs and benefits, and compute the benefit cost ratio (BCR) for a discount rate of 5% and 10%; b) Briefly comment upon the economic feasibility of the project. 

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The benefit-cost ratio of a project is used to indicate the overall value of the project. It uses the concept of TVM to determine the PV of the benefits and the costs to find the project’s profitability.

 

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