A large project requires an investment of $200 million. The construction will take 3 years: $30 million will be spent during the first year, $100 million during the second year, and $70 million during the third year of construction. Two project operation periods are being considered: 10 years with the expected net profit of $40 million per year and 20 years with the expected net profit of $32.5 million per year. For simplicity of calculations it is assumed that all cash flows occur at end of year. The company minimum required return on investment is 10%.
Calculate for each alternative:
The payback period
The total equivalent investment cost at the end of the construction period
The equivalent uniform annual worth of the project (use the operation period of each alternative) Which operation period should be chosen?