Question

1) A project has a 3 year life and cost $30,000. Inflation is 3% and the project is expected to generate the following returns:

year 1:   $8,000

year 2: $12,000

year 3: $11,000

I) Given the rate of inflation the company will make money on this project

A) Yes

B) No

II) Whats the NPV contribution of the 2nd year ($12,000) return?

A) $12,000

B) $11,311.15

C) $22,857.14

D) $10,884.35

Answer 1

I) Answer: B) No

Explanation:

	Returns	x	Present value Factor @ 3%	=	Present value
Year 1	$8,000	x	0.97087	=	$7,767
Year 2	$12,000	x	0.9426	=	$11,311
Year 3	$11,000	x	0.91514	=	$10,067
Total present value in flows					$29,145
(Less): Cost					($30,000)
NPV					($855)

Company can make money on this project if NPV is Positive. But, NPV is negative.

So, Company will not make money on this project.

II) Answer: B)$11,311.15

Explanation:

	Returns	x	Present value Factor @ 3%	=	Present value
Year 2	$12,000	x	0.9426	=	$11,311