QUESTION SIX

The project requires an $500,000 at outset and further payments at the end of each of the first 5years, 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.