Benefit/Cost Analysis
In benefit/cost analysis,
methods such as Net Present Value (NPV), Internal Rate of Return (IRR),
Benefit/Cost Ratio, and Payback Period (PBP) are mainly used. In this
feasibility Analysis, we evaluated economic feasibility by using various
indicators, each of which has its Own merits and demerits.
Net Present Value (NPV)
Net Present Value (NPV) is the most widely used method,
which is calculated by subtracting PV of cash inflows by PV of cash outflows.
Decision-making on NPV
is: the bigger the NPV, the more desirable the investment is. However, NPV
should be greater than 0, in cases when NPV is less than 0; this indicates that
the investment lacks absolute economic feasibility.
Net Present Value (NPV) is $24,977.08
Comments- Project is
feasible.
Benefit/Cost Ratio
Benefit/Cost Ratio (B/C
Ratio) is an indicator to summarize the overall value for investment of a
project. That is, bigger NPV doesn’t always mean that the investment is
worthwhile. If two investment schemes having different sizes of investment
suggest the same NPV, the scheme whose investment size is smaller would be
better, but it’s hard to tell with NPV only.
Benefit/Cost
Ratio is 1.89
Comments-
Project is feasible.
Internal Rate of Return (IRR)
Internal Rate of Return (IRR)
or Economic Internal Rate of Return (EIRR) is the supplementary method used
when deciding the discount rate for NPV is difficult. That is, IRR means the
discount rate that makes the present value of all cash inflows equal to the
present value of all cash outflows, i.e., IRR plays a role as a return on investment.
For example, when the IRR is 20%, it indicates that a return of about 20% will
be incurred. Formula for IRR is as follows.
A project with a higher
IRR would provide a better chance for strong growth; it is interpreted that
when IRR is greater than the social discount ratio, it would be absolutely
economical.
Internal Rate of Return (IRR) is 71%
Comments-
Project is feasible.
Benefit/Cost Analysis Results
NPV
|
$24,977.08
|
IRR
|
71%
|
B/C Ratio
|
1.897625784
|
Therefore, this project is deemed economically feasible.
Annual Benefit to Cost
Period
|
NPV
|
B/C Ratio
|
year 1
|
($39,941.51)
|
1.3401771
|
year 2
|
($17,939.48)
|
1.5969515
|
year 3
|
($268.98)
|
1.8561409
|
year 4
|
$13,818.54
|
2.1413018
|
year 5
|
$24,977.08
|
2.45404
|
Sensitivity Analysis Results
NPV changes when Discount rate or
Industry growth rate changes
246119.10
|
0.3%
|
0.4%
|
0.5%
|
0.6%
|
0.7%
|
12%
|
234570.00
|
233262.52
|
231962.80
|
230670.79
|
229386.42
|
13%
|
241651.34
|
240307.82
|
238972.29
|
237644.69
|
236324.97
|
14%
|
248871.31
|
247491.10
|
246119.10
|
244755.27
|
243399.53
|
15%
|
256252.00
|
254834.19
|
253424.83
|
252023.86
|
250631.22
|
16%
|
263733.21
|
262277.23
|
260829.94
|
259391.28
|
257961.19
|
Case
when Discount rate changes from 0.3% to 0.7% and Industry growth rate changes
from12% to16%
B/C ratio changes when Industry growth rate changes
|
|||||
$1.36
|
0.01%
|
0.25%
|
0.50%
|
0.75%
|
1.00%
|
12%
|
1.35
|
1.35
|
1.35
|
1.35
|
1.35
|
13%
|
1.35
|
1.35
|
1.35
|
1.35
|
1.35
|
14%
|
1.36
|
1.36
|
1.36
|
1.36
|
1.36
|
15%
|
1.36
|
1.36
|
1.36
|
1.36
|
1.36
|
16%
|
1.37
|
1.37
|
1.37
|
1.37
|
1.37
|
Case when Discount rate
changes from 0.3% to 0.7% and Industry growth rate changes from12% to16%
|
|||||
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