An investor is considering investing in a capital project. The project requires an outlay of 500,000 at
Question:
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.