A certain program is to be evaluated for economic efficiency. The investments (costs) and returns are given in Table 4.9 below. Evaluate B-C ratio, NPW, Payback Period, and IRR for discount rates of 5%, 10%, and 20%. Comment on the attractiveness of this program. Solution Net present value r = 5% -10000 + 5000/1.05 + 5000/1.05^2 + ...... - 35000/1.05^10 = 4052.14 In a similar way when r = 10%, NPV = 5301.10 when r = 20%, NPV = 4502.14 Internal Rate of Return 10000 = 5000/(1+r) + 5000 / (1+r)^2 + ...... -35000 / (1+r)^10 r = 0% Note : In certain cases where there is a cash outflow in the duration of the project, it might lead to multiple IRRs. In such cases calculating modified rate of return is more viable. Payback Period : 2 years. In 2 years the initial investment will be recovered. The demerit of this method is that it does not include npv and does not take the slavage cost into consideration. B-C Ratio : When r = 5% PV of all the future benefit = 14052.14 Benefit/cost = 14052.14/10000 = 1.405 When r = 10% PV of all the future benefit = 15301.10 Benefit/cost = 15301.10/10000 = 1.53 When r = 20% PV of all the future benefit = 14502.14 Benefit/cost = 14502.14/10000 = 1.450 The programme is most attractive when the dicount rate is 10% as given by NPW. We choose this method because it takes into cosideration the TV of money..