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EVALUATION OF
SINGLE PROJECT
Given:
Investment = P270,000
Annual Revenue = P185,400 for 5 years
Salvage Value = 10% of investment
Operation and Maintenance Cost = P81,000 per year
Taxes and Insurance Cost = 4% of Investment
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Rate of Return
Solution:
Step 3: Determine the Total Annual Cost and Total Annual Revenue
Based from the problem, annual revenue = P185,000, then we need to
determine what is the total cost to determine the Net Annual Profit
Cost
Operation and Maintenance Cost = P81,000
Taxes and Insurance Cost = P270,000(0.04) = P10,800
Depreciation Cost = P29,609 (used Sinking Fund Method
where i = 25%)
Total Cost = P121,409
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Rate of Return
Solution:
Solution:
P63,991
RoR
P270,000
X100 23.70%
Given:
Investment = P270,000
Annual Revenue = P185,400 for 5 years
Salvage Value = 10% of investment
Operation and Maintenance Cost = P81,000 per year
Taxes and Insurance Cost = 4% of Investment
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Annual Worth Method
Solution:
Solution:
Step 3: Determine the Annual Cash Inflow and Annual Cash Outflow
Based from the problem, annual revenue = P185,000 which is the cash
inflow, we need to determine the total annual cash outflows
Note: If excess is positive value, then the investment is advisable, otherwise, do not
invest.
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Annual Worth Method
Solution using tabulated form:
This pattern for economy studies is based on the concept of present worth.
If the present worth of the net cash flows is equal to, or greater than zero,
the project is justified economically. The present worth method is flexible
and can be used for any type of economy study. It is extensively in making
economy studies in the public works field, where long-lived structures are
involved.
Here, we will just get the present value of money using the formula in money-time
relationship.
Decision.
*Since the PW of the net cash flows is less than zero (-P10,510) the investment is not
justified or not ideal.
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Future Worth Method
The future worth method for economy studies is exactly comparable to the
present worth method except that all cash inflows and outflows are
compounded forward to a reference point in time called the future. If the
future worth of the net cash flow is equal to, or greater then zero, the project
is justified economically.
Here, we will forward the value of money in future time using also the formula in
money-time relationships.
Decision
*Since the FW of the net cash flows is less than zero (-P28,810) the investment is
not justified or not ideal.
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Payback Period
The payback period is commonly defined as the length of time required
to recover the first cost of an investment from the net cash flow produced
by that investment for an interest rate of zero.
= P270,000-P27,000
P93,600