ANSWER

a)        
  Intial Outflow Periodic Outflow Annual OutflowTotal Outflow
                    
2020             (40.0)
(40.0)
                    
2021             (40.0)
(40.0)
                    
2022             (40.0)
(40.0)
                    
2023             (40.0)
(40.0)
2024                             (3.0)           (3.0)
2025                             (3.0)           (3.0)
2026                             (3.1)           (3.1)
2027                             (3.1)           (3.1)
2038                             (3.1)           (3.1)
2039                             (3.2)           (3.2)
2030                             (3.2)           (3.2)
2031                             (3.2)           (3.2)
2032                             (3.2)           (3.2)
                             
2033                           (3.3)           (8.3)
(5.0)
2034                             (3.3)           (3.3)
2035                             (3.3)           (3.3)
2036                             (3.4)           (3.4)
2037                             (3.4)           (3.4)
2038                             (3.4)           (3.4)
2039                             (3.5)           (3.5)
2040                             (3.5)           (3.5)
2041                             (3.6)           (3.6)
2042                             (3.6)           (3.6)
                              
2043                           (3.6)           (8.6)
(5.0)
2044                             (3.7)           (3.7)
2045                             (3.7)           (3.7)
2046                             (3.7)           (3.7)
2047                             (3.8)           (3.8)
2048                             (3.8)           (3.8)
2049                             (3.8)           (3.8)
2050                             (3.9)           (3.9)
2051                             (3.9)           (3.9)
2052                             (4.0)           (4.0)
                             
2053                           (4.0)           (9.0)
(5.0)
2054                             (4.0)           (4.0)
2055                             (4.1)           (4.1)
2056                             (4.1)           (4.1)
2057                             (4.2)           (4.2)
2058                             (4.2)           (4.2)
2059                             (4.2)           (4.2)
2060                             (4.3)           (4.3)
2061                             (4.3)           (4.3)
2062                             (4.4)           (4.4)
                             
2063                           (4.4)           (9.4)
(5.0)
Assumed 3 Million Annual maintenece will also be required in the year of Major overhauling

b) PW of          
project is $-
145.564
MLN.
             
Annual Total Discount
  Intial Outflow Periodic Outflow
Outflow Outflow rate
             
2016         0.943396 0
2017         0.889996 0
2018         0.839619 0
2019         0.792094 0
                     -
2020             (40.0) 0.747258
(40.0) 29.8903
                     -
2021             (40.0) 0.704961
(40.0) 28.1984
                     -
2022             (40.0) 0.665057
(40.0) 26.6023
                     -
2023             (40.0) 0.627412
(40.0) 25.0965
2024                             (3.0)           (3.0) 0.591898 -1.7757
-
2025                             (3.0)           (3.0) 0.558395
1.69194
-
2026                             (3.1)           (3.1) 0.526788
1.61213
-
2027                             (3.1)           (3.1) 0.496969
1.53608
-
2028                             (3.1)           (3.1) 0.468839
1.46363
-
2029                             (3.2)           (3.2) 0.442301
1.39459
-
2030                             (3.2)           (3.2) 0.417265
1.32881
-
2031                             (3.2)           (3.2) 0.393646
1.26613
2032                             (3.2)           (3.2) 0.371364 -1.2064
                              -
2033                           (3.3)           (8.3) 0.350344
(5.0) 2.90122
-
2034                             (3.3)           (3.3) 0.330513
1.09528
-
2035                             (3.3)           (3.3) 0.311805
1.04361
-
2036                             (3.4)           (3.4) 0.294155
0.99439
-
2037                             (3.4)           (3.4) 0.277505
0.94748
-
2038                             (3.4)           (3.4) 0.261797
0.90279
2039                             (3.5)           (3.5) 0.246979 -0.8602
-
2040                             (3.5)           (3.5) 0.232999
0.81963
-
2041                             (3.6)           (3.6) 0.21981
0.78097
-
2042                             (3.6)           (3.6) 0.207368
0.74413
                              -
2043                           (3.6)           (8.6) 0.19563
(5.0) 1.68718
-
2044                             (3.7)           (3.7) 0.184557
0.67558
-
2045                             (3.7)           (3.7) 0.17411
0.64372
-
2046                             (3.7)           (3.7) 0.164255
0.61335
-
2047                             (3.8)           (3.8) 0.154957
0.58442
-
2048                             (3.8)           (3.8) 0.146186
0.55685
-
2049                             (3.8)           (3.8) 0.137912
0.53059
 -
2050                             (3.9)           (3.9) 0.130105
0.50556
-
2051                             (3.9)           (3.9) 0.122741
0.48171
-
2052                             (4.0)           (4.0) 0.115793
0.45899
                              -
2053                           (4.0)           (9.0) 0.109239
(5.0) 0.98353
-
2054                             (4.0)           (4.0) 0.103056
0.41671
-
2055                             (4.1)           (4.1) 0.097222
0.39705
-
2056                             (4.1)           (4.1) 0.091719
0.37832
-
2057                             (4.2)           (4.2) 0.086527
0.36048
-
2058                             (4.2)           (4.2) 0.08163
0.34348
-
2059                             (4.2)           (4.2) 0.077009
0.32727
-
2060                             (4.3)           (4.3) 0.07265
0.31184
-
2061                             (4.3)           (4.3) 0.068538
0.29713
-
2062                             (4.4)           (4.4) 0.064658
0.28311
                              -
2063                           (4.4)           (9.4) 0.060998
(5.0) 0.57475
-
           
145.564
c)
Annual Worth of the project is this project is uselful for 40 year NPV is $145.564 Million than
145.564/40=3.6391 Million
In this problem, a construction company is going to start the construction of a new express
way to improve traffic. It is year end 2015. Construction will start 5 years after i.e. from 2020. It
will take 5 years to construct. Then it will be used in next 40 years.
Here three different cash outflows are required in between 2020 to 2063. They are-
1. Construction cost of $40 per year in 2020,2021,2022 and 2023.
2. Operation and maintenance cost of $3 million from year 2024 to 2063. In each year this cost
will go up by 1%. So a years cost will be 1.01 times of previous years cost.
3. Overhauling cost of $5 per year will be required after every 10 years of construction. So
years of overhauling are 2033,2043 and 2053.
Based on the above figures cash flow time fiagram is drawn below:
Calculation of present worth:
Present worth is the total present value of future cash flows in the project. Here curent year is
2015. Cash outflows are starting after 5 years. So present worth is to be calculated at the time
value of year 2015. Different cash outflows as stated above are converted to present worth in
three separate statements. They are shown below:
1. First statement is showing present worth of construction costs. First year is 2020. Amount
is $40million. It has been discounted by 1/(1.06^5). Here 6% is discount rate. Since this cash
flow will take place after 5 years, 5 is the discounting power in the above calculation. In this
manner 6,7 and 8 years discounting factors are used for cash flows of year 2021,2022 and
2023. It is shown in the table below:
Calculation of present worth of costruction cost

         
Year Constr Time Present  
  cost value of $ Worth  
         
2020 40 0.7472582 29.89033  
2021 40 0.7049605 28.19842  
2022 40 0.6650571 26.60228  
2023 40 0.6274124 25.09649  
Total 160 2.7446882109.7875 
Thus present worth of construction cost is $109.79 million.
Next portion is showing present worth of operation and maintenance. It starts from 2024 and
continues till 2063. First years discounting factor is at 6% for 9th year. So last year 48th year
from now. Calculations are shown below:
Calculation of present worth of Operation

and maintenance cost for 40 years

Year O&M Time Present

  cost value of $ worth
       
2024 3 0.5583948 1.675184
2025 3.03 0.5267875 1.596166
2026 3.0603 0.4969694 1.520875
2027 3.090903 0.468839 1.449136
2028 3.121812 0.442301 1.38078
2029 3.15303 0.4172651 1.315649
2030 3.18456 0.3936463 1.25359
2031 3.216406 0.3713644 1.194459
2032 3.24857 0.3503438 1.138116
2033 3.281056 0.330513 1.084432
2034 3.313866 0.3118047 1.033279
2035 3.347005 0.2941554 0.98454
2036 3.380475 0.2775051 0.938099
2037 3.41428 0.2617973 0.893849
2038 3.448423 0.2469785 0.851686
2039 3.482907 0.2329986 0.811513
2040 3.517736 0.21981 0.773234
2041 3.552913 0.207368 0.73676
2042 3.588442 0.1956301 0.702008
2043 3.624327 0.1845567 0.668894
2044 3.66057 0.1741101 0.637342
 2045 3.697176 0.1642548 0.607279
2046 3.734148 0.1549574 0.578634
2047 3.771489 0.1461862 0.55134
2048 3.809204 0.1379115 0.525333
2049 3.847296 0.1301052 0.500553
2050 3.885769 0.1227408 0.476942
2051 3.924627 0.1157932 0.454445
2052 3.963873 0.1092389 0.433009
2053 4.003512 0.1030555 0.412584
2054 4.043547 0.0972222 0.393122
2055 4.083982 0.091719 0.374579
2056 4.124822 0.0865274 0.35691
2057 4.16607 0.0816296 0.340075
2058 4.207731 0.0770091 0.324033
2059 4.249808 0.0726501 0.308749
2060 4.292306 0.0685378 0.294185
2061 4.335229 0.0646583 0.280309
2062 4.378582 0.0609984 0.267086
2063 4.422368 0.0575457 0.254488
SUM 146.6591 8.90588 30.37325
Thus present worth of operation and maintenance cost of 40 years is $30.37 million.
Last element of cost is overhauling cost. This cost has ben incurred in 203,2043 and 2053. So
discounting factors are taken for 18 years, 28 years and 38 years from 2015. Calculations are
shown below:
Overhauling cost of the project  

       
Year AmountDiscounting Present
    factor $ worth
       
2033 5 0.330513 1.652565
 2043 5 0.1845567 0.922784
2053 5 0.1030555 0.515278
Total 15 0.6181253 3.090626
       
Thus present worth of overhauling cost is $3.09 million.
Add above three tables total to get total present worth of this capital project as on 2015 end.
It is -
Answer of part (c):
In order to ascertain annual present worth, divide total present worth by the sum of one
dollers present value starting from year 2020 to year 2063. It is 12.18492 as shown in the table
below:
Year PW of 1$
20200.747258
20210.704961
20220.665057
20230.627412
20240.591898
20250.558395
20260.526788
20270.496969
20280.468839
20290.442301
20300.417265
20310.393646
20320.371364
20330.350344
20340.330513
20350.311805
20360.294155
20370.277505
20380.261797
20390.246979
20400.232999
2041 0.21981
20420.207368
2043 0.19563
20440.184557
2045 0.17411
20460.164255
20470.154957
20480.146186
2049