Ghana's National Cathedral is expected to take three years to be constructed. In each of the construction years, it will cost $15 million plus an additional maintenance cost of $4 million and $5 million in year 5 and 6 respectively. The cathedral is expected to generate revenue of $20 million annually a year after the construction is completed. It will be sold to a new owner seven years after the construction is completed. assume interest to be 10 percentCalculate the annual worth of this investment. $ Blank 1. Fill in the blank, read surrounding text.
Question
Ghana's National Cathedral is expected to take three years to be constructed. In each of the construction years, it will cost 4 million and 20 million annually a year after the construction is completed. It will be sold to a new owner seven years after the construction is completed. assume interest to be 10 percentCalculate the annual worth of this investment. $ Blank 1. Fill in the blank, read surrounding text.
Solution 1
To calculate the annual worth of this investment, we need to consider both the costs and the revenues over the period of the investment.
Step 1: Calculate the total cost of construction and maintenance.
The construction cost is 15 million = $45 million.
The maintenance cost is 5 million in year 6, so the total maintenance cost is 5 million = $9 million.
So, the total cost of the investment is 9 million = $54 million.
Step 2: Calculate the total revenue generated by the cathedral.
The cathedral generates 20 million = $140 million.
Step 3: Calculate the net present value (NPV) of the investment.
The NPV is the difference between the present value of cash inflows and the present value of cash outflows.
We need to discount the costs and revenues to their present values because of the time value of money.
The formula for the present value is PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of periods.
The present value of the costs is 40.54 million.
The present value of the revenues is 73.58 million.
So, the NPV is 40.54 million = $33.04 million.
Step 4: Calculate the annual worth of the investment.
The annual worth is the NPV divided by the number of years of the investment.
So, the annual worth is 3.304 million.
Therefore, the annual worth of this investment is $3.304 million.
Solution 2
To calculate the annual worth of this investment, we need to consider both the costs and the revenues over the entire period of the project, which is 10 years (3 years of construction + 7 years after construction).
Here are the steps:
-
Calculate the total cost of construction: This is 4 million in year 5 and 49 million.
-
Calculate the total revenue: The cathedral generates 140 million.
-
Calculate the net cash flow for each year: This is the revenue minus the cost for each year. For the first 3 years, the net cash flow is -20 million. For year 5, the net cash flow is 4 million = 20 million - 15 million. For years 7 to 10, the net cash flow is $20 million.
-
Calculate the present worth of the net cash flows: This is done by discounting the net cash flows to the present using the interest rate of 10%. The formula for present worth is CF/(1+i)^n, where CF is the net cash flow, i is the interest rate, and n is the year.
-
Calculate the annual worth: This is the present worth converted to an equivalent annual amount using the interest rate of 10%. The formula for annual worth is PW*(i*(1+i)^n)/((1+i)^n - 1), where PW is the present worth, i is the interest rate, and n is the number of years.
By following these steps, you can calculate the annual worth of this investment.
Solution 3
To calculate the annual worth of this investment, we need to consider both the costs and the revenues over the period of the investment.
Step 1: Calculate the total cost of construction and maintenance.
The construction cost is 15 million = $45 million.
The maintenance cost is 5 million in year 6, so the total maintenance cost is 5 million = $9 million.
So, the total cost of the investment is 9 million = $54 million.
Step 2: Calculate the total revenue generated by the cathedral.
The cathedral generates 20 million = $140 million.
Step 3: Calculate the net present value (NPV) of the investment.
The NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
We need to discount the costs and revenues to their present values because of the time value of money.
The formula for the present value is PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of periods.
The present value of the costs is 40.54 million.
The present value of the revenues is 73.58 million.
So, the NPV is 40.54 million = $33.04 million.
Step 4: Calculate the annual worth.
The annual worth is the NPV divided by the number of years of the investment.
So, the annual worth is 3.304 million.
Therefore, the annual worth of this investment is $3.304 million.
Similar Questions
Cinnabar Construction Company has consistently used the input method based on costs incurred to recognize revenue from a performance obligation satisfied over time. During Year 1, Cinnabar entered into a fixed-price contract to construct an office building for $10 million. Information relating to the contract is as follows:December 31Year 1Year 2Progress to completion20%60%Estimated total costsat completion$7,500,000$8,000,000Gross profit recognized(cumulative)500,0001,200,000Contract costs incurred during Year 2 were
Malian earns a yearly salary of $130,000 in her job and earns $1,000 per year in interest on her savings. After she quits her job to start a company, she uses all her savings to purchase manufacturing equipment for her company. Other inputs for the business cost a total of $200,000. Her revenue the first year is $350,000. Given this information, how much economic profit or loss does Malian make?Question 15Answera.$219,000b.$171,000c.$19,000d.$21,000
Moore, an investment property company, has been constructing a new cinema building for the last 18 months. At 31 December 20X7, the cinema was nearing completion, and the costs incurred to date were:$mMaterials, labour and sub-contractors 14.8Other directly attributable overheads 2.5Interest on borrowings 1.3The building is deemed to be a qualifying asset and therefore any borrowing costs are capitalised as part of the cost of the building. A specific loan of $18million was obtained to fund this project and the annual rate of interest rate is 9.5%.During the three months to 31 March 20X8 the project was completed, with the following additional costs incurred:$mMaterials, labour and sub-contractors 1.7Other directly attributable overheads 0.3The company was not able to determine the fair value of the property reliably during the construction period and so used the allowance within IAS 40 Investment Property to measure at cost until construction was complete.On 31 March 20X8, the company obtained a professional appraisal of the cinema’s fair value, and the valuer concluded that it was worth $24 million. The fee for his appraisal was $100,000, and has not been included in the above figures for costs incurred during the three months.The cinema was taken by a national multiplex chain on an operating lease as at 1 April 20X8, and was immediately welcoming capacity crowds. The lease agreement allows for annual revisions, and it was therefore clear that it was worth even more than the valuation at 31 March 20X8. Following a complete valuation of the company’s investment properties at 31 December 20X8, the fair value of the cinema was established at $28 million.Required:Set out the accounting entries in respect of the cinema complex for the year ended 31 December 20X8.
If the diamtere of the base of the cyndrical pillars is 4 m and its height is 21 m, then the cost of construction of the piilar at Rs. 1.50 per cubic metre is.ARs.396
Assume that the company decides to continue with the current Love business. The following financial information is further available to you: Love business requires additional $1 billion over the next three years starting with the current year. These capital expenditures have been projected, including expected future cost increases, as follows: Year end 2022 2023 2024 Construction costs ($ million) 300 600 100 Generation of surplus from this expansion will commence in 2025 and the annual operating surplus in cash terms is expected to be $100 million per annum (at 1 January 2025 price and cost levels). This value has been well validated by preliminary studies and includes the cost of reprocessing, ongoing maintenance and systems replacement as well as the continuing operating costs of running the plant. The operating surplus is expected to rise in line with nominal GDP growth. The plant is expected to have an operating life of 30 years. Decommissioning costs at the end of the project have been estimated at $600 million at current (2022) costs. Decommissioning costs are expected to rise in line with nominal GDP growth. The company’s nominal cost of capital is 10% per annum. All estimates, unless otherwise stated, are at 1 January 2022 price and cost levels. The core macro economic assumptions are that country’s GDP will grow at an annual rate of 4% (nominal) and inflation will be maintained at the 2% target set by the Government. Produce a preliminary briefing note on the basis of the above information which includes: (i) An estimate of the net present value for this project as at the commencement of construction in 2022. (10 marks) (ii) A discussion of the principal uncertainties associated with this project (4 marks) (iii) A sensitivity of the project’s net present value (in percentage and in $), to changes in the construction cost, the annual operating surplus and the decommissioning cost. (4 marks) (Assume that the increase in construction costs would be proportional to the initial investment for each year.)
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.