Q 13
Jigger Ltd is considering undertaking project X, which will involve an initial outlay of £600k. The project has the following cash inflows associated with it:
| Project X | |
| Year 1 | £100,000 |
| Year 2 | £200,000 |
| Year 3 | £300,000 |
| Year 4 | £400,000 |
What is the NPV of project X if a 12% discount rate is used?
| a) | A negative NPV of £118,000 |
| b) | A positive NPV of £718,000 |
| c) | A positive NPV of £200,000 |
| d) | A positive NPV of £118,000 |
| d) | A positive NPV of £118,000 |
Working:
| Year | Cash flows | Discount factor | Present Value of Cash inflows | ||||
| a | b | c=1.12^-a | d=b*c | ||||
| 1 | £ 1,00,000 | 0.89 | £ 89,000 | ||||
| 2 | 2,00,000 | 0.80 | 1,60,000 | ||||
| 3 | 3,00,000 | 0.71 | 2,13,000 | ||||
| 4 | 4,00,000 | 0.64 | 2,56,000 | ||||
| Total | 7,18,000 | ||||||
| Less:Cost of the project | 6,00,000 | ||||||
| Net Present Value | £ 1,18,000 | ||||||
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