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0 METHODOLOGY
The current value of a future sum of money or stream of ash flows with a specified rate of
return is known as present value (PV)
𝐹𝑉
𝑃𝑉 =
(1 + 𝑖)𝑛
PV = (666 600)/(1+0.05)10
PV = 409 234.57
𝑇
𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤
𝑁𝑃𝑉 = ∑ − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐶𝑎𝑠ℎ 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
(1 + 𝑖)𝑛
𝑡=1
BCR = 5.63
1
1−
(1 + 𝑖)𝑛
𝑃𝑉 = 𝑃𝑀𝑇 ⌊ ⌋
𝑖
IRR 5%
1
1−
(1 + 0.05)10
𝑃𝑉 = 666 600 ⌊ ⌋
0.05
𝑃𝑉 = 5 147 308.50
IRR 50%
1
1−
(1 + 0.5)10
𝑃𝑉 = 666 600 ⌊ ⌋
0.5
𝑃𝑉 = 1 310 080.27
Interpolation Method
𝐼𝑅𝑅 − 5%
= 1.0222
45%
𝐼𝑅𝑅 − 5% = 1.0222(45%)
𝐼𝑅𝑅 = 46% + 5%
𝐼𝑅𝑅 = 51%
Return on Investment
𝑅𝑂𝐼 = 5.75
Payback Period
Basically a negative NPV gives a good return and the other way around. In order for the project
to be approved and accepted, the project should give positive value of NPV or else the project
would be rejected. Based on our calculation, our project gives a positive value of NPV which
is RM 3 537 91522. Thus, our agro tourism project in Bako is accepted as it gives benefits after
paying all cost to develop the place.
Cost benefit ratio is all about the ratio of discounted benefits to discounted costs. The benefit
cost ratio (B/C ratio) is one of the standards for project investment. The definition of this
ratio is the present value of net positive ash flow divided by net negative cash flow at i.
Assuming the probability of success was 75% and probability of achieving cost target was 90%.
For this ratio, in order for the project to be accepted, the ratio need to be greater than one which
means there are more benefits than costs. Nevertheless, the results might be misleading as the
ratio does not take the size of the project into account. The rule of thumb of B/C ratio is that if
the BCR is greater than 1:1, it indicates that the project can be proceed. This is because BCR
that is higher than zero means that a positive NPV but there will always be a project with higher
value of BCR. This ratio also can rank projects accordingly.
Based on our calculation towards our project, we found that our BCR is greater than 1:1 thus
the project can be proceed.
Other than that, the internal rate of return (IRR) is evaluated too. Internal rate of return can be
defined as the maximum rate of interest that a project can afford to pay for the resources used
which allows the project to cover the initial capital outlay and ongoing costs and at the same
time, break even. Basically, IRR is the discount rate equal to the present value of benefits and
costs. It should be taken into minds that IRR does not differentiate between projects of different
scopes.
𝑰𝑹𝑹 = 𝟓𝟏%
Our project’s value of IRR is 51% which is quite good as it is the maximum rate of interest that
our project can afford to pay for the resources. This project should be accepted as the IRR is
higher than WACC (assuming WACC is 15%).
𝑹𝑶𝑰 = 𝟓. 𝟕𝟓
According to our project, our return on investment is at 5.75%. This shows that ROI of our
project is attractive enough to invite potential investors to inject their money into our project.
These investors may get 5.75% over the term of the money being in the project.
The length of time required to recover the cost of investment is defined as the payback period.
Initially, investor would not be interested with project that have a much longer payback period
So a shorter time taken for the company to give bac to their investor, the better it is. This
payback period ignores the time value of money unlike other methods
In our agro tourism project, the amount of time for the project to recapture back the initial
investment is 3.26 years. This might attract the potential investor as the project have a shorter
period of time to pay back the initial investment