Calculate the npv and irr

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The Small Business Administration (SBA) is evaluating a firm's proposed project with a development period of three years and a benefit period of ten years. The required total investments at the end of years 1, 2, and 3 are $3,500, $5,000, and $4,000 respectively. Interest during the development period is capitalized. Add the interest charge each year to the capital outlay for that year to get the total outlay using the loan interest rate. Initial operating cost in year 4 is $350, and it remains constant in real terms over the remaining life of the project. The initial annual benefit is $2,800/year beginning at the end of year 4. However, this benefit is expected to grow at an annual rate of 2% beginning in year 5. The income tax rate is 20%. The discount rate for the firm is 12%. Ignore inflation for this problem.

Undertake a "market analysis" in which you assess the benefits and costs of the project at market prices without any consideration of financing or taxes except that the interest during construction will be included in the capital charge to be applied in year 3. Calculate the NPV and IRR.

Reference no: EM132460206

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