Solve the following problem using excel: The program is estimated to require a 10-year commitment to fully achieve the desired result. Analyze the following information using both the Net Present Value (NPV) method and the Internal Rate of Return (IRR) method.
(I have already worked and solved this problem, however as it is complex and contains a large number of values to be calculated, I want to be sure that I applied all appropriate concepts correctly.)
I have attached the directions and problem in a screenshot.
Initial investment = purchase cost = 210,000
Annual benefit will be calculated in three steps:
Let's handle them one by one:
Annual incremental property taxes:
Current taxable value = 12,000,000,000
Millage rate= 7.2 mils
1 mill = 1/1000
Hence, current annual property tax = 12,000,000,000 x 7.2 x 1/1000 = 86,400,000
Improvement in annual property tax in ordinary course = 5%
Increase due to addition of features = 2%
And subsequent increase = 1/10 of the value of previous year
hence, incremental property taxes in year 1 = 86,400,000 x 5% x (1+2%) x 1/10 = $ 440,640
Hence incremental property tax in year 2 = 440,640 x (1 + g)
Hence incremental property tax in year 3 = 86,400 x (1 + g)2
Hence incremental property tax in year 3 = 86,400 x (1 + g)N-1
Please see the table below for the incremental property taxes for each of the year:
|Year||Initial investment||Annual incremental property taxes|
Let's now calculate annual salary and benefits costs.
Year 1 cost is 243,500 and the same is expected to increase every year by g = 2.5%
Hence, year 2 cost will be = 243,500 x (1+g) = 243,500 x (1 + 2.5%)
Year 3 cost will be = 243,500 x (1+2.5%) 2 and so on
Year N cost will be = 243,500 x (1+2.5%)N-1
Please see the table below for annual salary & benefit costs:
|Year||Salary & Benefit costs|
|N||= 243,500 x (1 + g)N-1|
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