Question

What is the net present value of a project that requires a $2,000 investment today and returns $800 at the end of the first year and $1,700 at the end of the second year? Assume a discount rate of 10%

Answer 1

Formula :

PV = A/(1 + r)ⁿ

where PV = Present value, A = amount after nth year, r = interest rate(here discount rate) = 10% = 0.10 and n = time period.

Note If you paid money then it will consider as negative (like here investment made today) and If you receive money then it will consider as positive (like amount received at the end of first and second year)

Thus, Net Present value(NPV) = (-2000)/(1 + 0.10)⁰ + 800/(1 + 0.10)¹ + 1700/(1 + 0.10)²

=> NPV = 132.23

Hence, Net Present value(NPV) = $132.23