A government is evaluating a highway project. The initial construction cost is ₦150 billion (paid at time 0). For the first five years the project yields an annual benefit of ₦25 billion and incurs an annual maintenance cost of ₦5 billion (net cash flow = ₦20 billion each year). From year 6 onward the annual benefit grows by 3 % per year, while the maintenance cost grows by 2 % per year, and the project is evaluated over a 20‑year horizon. Using a discount rate of 10 % per annum, calculate the net present value (NPV) of the project and state whether it should be accepted (NPV  0). Also estimate the internal rate of return (IRR) to the nearest 0.1 %.

Question

A government is evaluating a highway project. The initial construction cost is ₦150 billion (paid at time 0). For the first five years the project yields an annual benefit of ₦25 billion and incurs an annual maintenance cost of ₦5 billion (net cash flow = ₦20 billion each year). From year 6 onward the annual benefit grows by 3 % per year, while the maintenance cost grows by 2 % per year, and the project is evaluated over a 20‑year horizon. Using a discount rate of 10 % per annum, calculate the net present value (NPV) of the project and state whether it should be accepted (NPV > 0). Also estimate the internal rate of return (IRR) to the nearest 0.1 %.

Accepted Answer

NPV ≈ ₦42.2 billion; IRR ≈ 13.6 %

Waec Model Questions Vol1 2019 Economics Question 44

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