Question

A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $20,000, and $15,000 in the next five years. It will cost $50,000 to implement the project. If the required rate of return is 15 percent and your financial advisors predict inflation to remain at 3.5 percent into the foreseeable future, what is the NPV?

Answer 1

Solution:
	NPV of the product is $15,052.66
Working Notes:
Notes:	Here required rate of return & Inflation rate is given not nominal or real rate of return is given , so we will not used Fischer method to get real or nominal rate of return , Simply We get discount rate for the project which is sum of required rate of return of the project & inflation. as we must discount the project with rate which get us required rate of return after set off effect of inflation on project. Hence Discount rate of the project (with inflation) = required rate of return + Inflation rate = 15% + 3.5% = 18.5%
	A	B	C = A x B
Year	Division cash flow	PVF @ 18.5%	present value
0     (cost)	-50,000	1	-50,000
1	$15,000	0.843881857	$12,658.23
2	$25,000	0.712136588	$17,803.41
3	$30,000	0.600959146	$18,028.77
4	$20,000	0.50713852	$10,142.77
5	$15,000	0.427964996	$6,419.47
		NPV	$15,052.66
Notes: PVF is calculated @ discount rate r= 18.5% = 1/(1+r%)^n = 1/(1+18.5%)^n     where n is the period for which PVF is calculated.
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