Questions: The government has approved a 15,000 grant to support this project. This grant has been added to the net cash flow of the project and re-estimate the investment criteria. Please note that the grant is paid in full to the project developer in year 1. Cash flow Grant 15,000 0 0 0 0 0 Total benefits 137,431 15,000 41,000 41,000 41,000 41,000 10,000 Total costs 112,643 51,000 23,000 23,000 23,000 23,000 0 Net Cash Flow 24,788 -36,000 18,000 18,000 18,000 18,000 10,000 Investment Criteria NPV (base year: 0) 24,788 IRR 38.52% % Benefit Cost Ratio 1.22 # Operating net benefits 0 18,000 18,000 18,000 18,000 10,000 Cumulative PV of net benefits 0 14,876 28,400 40,694 51,871 57,515 Investment Cost 36,000 Payback Period 3 Years Task III: the choice of the discount rate Take the Net Cash Flow estimated under task II and calculate the investment criteria for different discount rates

To calculate the investment criteria for different discount rates, we need to focus on the Net Present Value (NPV), Internal Rate of Return (IRR), and Benefit-Cost Ratio (BCR) for the project. The given data provides a base NPV, IRR, and BCR, but these values will change with different discount rates. Here's how you can approach this:

1. Net Present Value (NPV):

   • NPV is calculated by discounting the net cash flows to the present value using a specific discount rate. The formula for NPV is: \[ NPV = \sum \frac{CF_t}{(1 + r)^t} - I \] where \( CF_t \) is the net cash flow in year \( t \), \( r \) is the discount rate, and \( I \) is the initial investment.

2. Internal Rate of Return (IRR):

   • IRR is the discount rate at which the NPV of the project is zero. It can be found using trial and error or financial calculators/software.

3. Benefit-Cost Ratio (BCR):

   • BCR is calculated as the ratio of the present value of benefits to the present value of costs: \[ BCR = \frac{\sum \frac{Benefits_t}{(1 + r)^t}}{\sum \frac{Costs_t}{(1 + r)^t}} \]

Let's assume we want to calculate the NPV, IRR, and BCR for discount rates of 5%, 10%, and 15%.

• NPV Calculation: \[ NPV = \frac{-36,000}{(1+0.05)^0} + \frac{18,000}{(1+0.05)^1} + \frac{18,000}{(1+0.05)^2} + \frac{18,000}{(1+0.05)^3} + \frac{18,000}{(1+0.05)^4} + \frac{10,000}{(1+0.05)^5} \]

  • Calculate each term and sum them up to find the NPV.

• IRR and BCR:

  • Use financial software or a calculator to find the IRR.
  • Calculate BCR using the formula provided.

• Repeat the above steps using a 10% discount rate.

• Repeat the above steps using a 15% discount rate.

By calculating the NPV, IRR, and BCR for different discount rates, you can assess the project's sensitivity to changes in the discount rate. This analysis helps in understanding the risk and potential return of the project under varying economic conditions.