An investor is considering investing in a capital project. The project

requires an outlay of 500,000 at outset and further payments at the end

of each of the first 5 years, the first payment being 100,000 and each

successive payment increasing by 10,000.The project is expected to provide a continuous income at a rate of

80,000 in the first year, 83,200 in the second year, and so on, with

income increasing each year by 4% per annum compound. The income is

received for 25 years.

It is assumed that, at the end of 15 years, a further investment of

300,000 will be required and that the project can be sold to another

investor for 700,000 at the end of 25 years.

(a) Calculate the net present value of the project at a rate of interest of

11% per annum effective.

(b) Without doing any further calculations, explain how the net present

value would alter if the interest rate had been greater than 11% per

annum effective.