Question 1

cash outflow Cash inflow Total cash flow DF PV

constru. operatg flood Electricity Irrigation
0 -200,000 0 0 0 0 -200,000 1 -200000
1 -200,000 0 0 0 0 -200,000 0.869565 -173913.0435
2 -200,000 0 0 0 0 -200,000 0.756144 -151228.7335
3 -50,000 -5,000 50,000 75,000 70,000 0.657516 46026.13627
4 -50,000 -5,000 50,000 75,000 70,000 0.571753 40022.72719
5 -50,000 -5,000 50,000 75,000 70,000 0.497177 34802.37147
6 -50,000 -5,000 50,000 75,000 70,000 0.432328 30262.93171
7 -50,000 -5,000 50,000 75,000 70,000 0.375937 26315.59279
8 -50,000 -5,000 50,000 75,000 70,000 0.326902 22883.12417
9 -50,000 -5,000 50,000 75,000 70,000 0.284262 19898.36884
10 -50,000 -5,000 50,000 75,000 70,000 0.247185 17302.92943
11 -50,000 -5,000 50,000 75,000 70,000 0.214943 15046.02559
12 -50,000 -5,000 50,000 75,000 70,000 0.186907 13083.50051
13 -50,000 -5,000 50,000 75,000 70,000 0.162528 11376.95697
14 -50,000 -5,000 50,000 75,000 70,000 0.141329 9893.006059
15 -50,000 -5,000 50,000 75,000 70,000 0.122894 8602.613964
NPV -229625.492

Decision rule: accept the project if NPV is positive otherwise reject.

The project should not be undertaken because the NPV is negative. This implies that the present value
of the benefits is less than that of costs. The project has more cost than benefits therefore it is not
economically viable to undertake such a project.

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Question 2
1. Inflation is not considered

year 1 2 3 4 5 6
Net of 40000 40000 40000 40000 40000 40000
PV Factor 0.909 0.826 0.751 0.683 0.621 0.564
PV 36360 33040 30040 27320 24840 22560
Total Present value 174160
Initial Investment -72000
NPV K102,160

2. Inflation considered

Real Discount Rate = (1+df) / (1+f) – 1

Real Discount Rate = (1+0.1)/ (1+0.05) -1= 0.048

Real Discount Rate = 4.8 %

year 1 2 3 4 5 6
Net of 40000 40000 40000 40000 40000 40000
PV Factor 0.954 0.910 0.869 0.829 0.791 0.755
PV 38160 36400 34760 33160 31640 30200
Total PV 204320
Initial Investment -72000
NPV K132 320

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