1.
Vungu Rural District Council planning to fund one of the two competing horticulture projects for employment
creation in the community. The first project (Project A) is vegetable farming and the second project (Project B)
is fruit farming. These two projects have different costs and benefits spanning over five years.
The costs and benefits for project A are as follows:
Year Costs Benefits Discount Discounted Discounted
Factor Value of Value of
Costs Benefits
(DVC) (DVB)
1 7 000 000 0 0.93 6 510 000 0
2 4 000 000 2 000 000 0.87 3 480 000 1 740 000
3 3 000 000 5 000 000 0.81 2 430 000 4 050 000
4 2 000 000 8 000 000 0.76 1 520 000 6 080 000
5 1 000 000 11 000 000 0.71 710 000 7 810 000
TOTALS Total DVC Total DVB
14 650 000 19 680 000
Net Present Value (NPV) = Total Discounted Value of Benefits - Total Discounted Value of Costs
= 19 680 000 – 14 650 000
= 5 029 998
Benefit Cost Ratio (BCR) = Total Discounted Value of Benefits /Total Discounted Value of Costs
= 19 680 000 /14 650 000
= 1.34
1
1 Year 2 discount Year 3 discount Year 4 discount Year 5 discount
1.0 + r factor factor factor factor
(formular for Previous year Previous year Previous year Previous year
discount factor for discount factor/ discount factor/ discount factor/ discount factor/
year 1) discounting discounting discounting discounting
1 denominator denominator denominator denominator
1.0 + 0.07 = 0.93/1.07 = 0.87/1.07 =0.81/1.07 = 0.76/1.07
=0.87 =0.81 =0.76 =0.71
1/1.07
= 0.93
r =7%
=7/100
=0.07
2
The costs and benefits for project B are as follows:
Year Costs Benefits Discount Factor Discounted Discounted
Value of Costs Value of
(DVC) Benefits
(DVB)
1 12 000 000 0 0.93 11 160 000 0
2 8 000 000 3 000 000 0.87 6 960 000 2 610 000
3 6 000 000 5 000 000 0.81 4 860 000 4 050 000
4 3 000 000 7 000 000 0.76 2 280 000 5 320 000
5 1 000 000 8 000 000 0.71 710 000 5 680 000
TOTALS Total DVC Total DVB
25 970 000 17 660 000
Net Present Value (NPV) = Total Discounted Value of Benefits - Total Discounted Value of Costs
= 17 660 000 - 25 970 000
= - 8 310 000
Benefit Cost Ratio (BCR) = Total Discounted Value of Benefits /Total Discounted Value of Costs
= 17 660 000/25 970 000
= 0.68
3
One project recommended for implementation:
Decision rules:
NPV decision rules
1. Whenever, the NPV has a positive figure or number, then, that project must be considered for
implementation.
2. Whenever, the NPV has a negative figure or number, then, that project must not be considered for
implementation.
3. When the NPVs for both projects are positive,
As a public policy advisor for Vungu Rural District Council, and using a discount rate of 7% for both projects,
advise the council on which one project you recommend the council to implement and why?
Instructions
a. For each project year, calculate the discount factor, the Discounted Value of Benefits and the Discounted
Value of Costs.
b. Use both the Net Present Value and the Benefit Cost Ratio calculations to justify your recommended project,
