You have to evaluate an Infrastructure Investment project

You have to evaluate an Infrastructure Investment project in the P.R. of China. To make a solid recommendation you have to calculate the NPV, Payback Period, and the IRR as we discussed in class.

You have two scenarios you need to evaluate before making your final recommendation.

Alternative 1

The first option includes an initial investment of 19,500,000 and an annual maintenance fee of 500,000 at the end of each year. The rate of return i = 0.1 (10%). The revenue is shown below.

Calendar year    Year Cash Outflow Ao Cash inflow Ft  

2011 0. 19,500,000   

2012 1. 500,000. 3,950,000

2013. 2. 500,000. 6,010,000

2014. 3. 500,000. 7,925,000

2015. 4. 500,000. 10,300,000

2016. 5. 500,000. 12,000,000

Alternative 2

The second option includes an initial investment of 19,500,000 as well, but does not require a maintenance fee at the end of each year. The rate of return i = 0.1 (10%). However, the revenue is fixed at 6,755,000 for each of the five years.

Calendar year    Year Cash Outflow Ao Cash inflow Ft  

2011 0. 19,500,000   

2012 1. 6,755,000

2013. 2. 6,755,000

2014. 3. 6,755,000

2015. 4. 6,755,000

2016. 5. 6,755,000

1. a) After you calculate the NPV, Payback Period, and the IRR for each option, make a recommendation regarding which option you would recommend and why.

2. b) Your chief economist is telling you that an inflation rate of 5% should be expected. What is the impact on your analysis?

3. c) Perform a sensitivity analysis to test your conclusions. Would that change your opinion or not?