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Ans.
The Initial Investment: $ 300000
Borrowed Amount: $ 150000 (Half of the investment)
(a) Loan Interest Rate: 12%
The Present Value Annuity Factor at 12% for 4 years is 3.0373
Therefore, Present Value= Annuity * Present Value annuity factor
150000 = A * 3.0373
A = 150000/3.0373
A = $ 49385.96
Therefore installment for per year loan repayment will be $ 49385.96. In total company needs to pay 4* 49385.96 = $ 197543.87.
(b) Present Worth of the investment opportunity = Aggregate of present value of cash inflow - Aggregate of present value of cash outflow
| Types of cash flow | Year | Amount (in Dollar) (A) | PV Factor @ 10% (B) | Present Value (A*B) |
| Cash Inflow | From Year 1 to 10 (Annuity) | 70000 | 6.1446 | 430122 |
| Cash Outflow | Year 0 (Initial Investment at present) | 300000 | 1 | (300000) |
| Cash Outflow (Environmental Impact Fee) | at the end of year 5 | 25000 | .6209 | (15523.03) |
| Cash Outflow | at the end of year 10 | 25000 | .3855 | (9638.58) |
Present Worth of investment opportunity = 430122-(300000+15523.03+9638.58) = $ 104960.4
(c) Since the Present worth of investment opportunity is positive, therefore the project seems to be profitable. Also the interest amount on loan is lower than the present worth,therefore, it is a profit making project even after borrowing half of the investment amount.
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