Question

3.

What is the NPV of a project that costs $15,000 today and another $5,000 in one year, and is then expected to generate 13 annual cash inflows of $2,000 starting at the end of year 5. Cost of capital is 8%. Round to the nearest cent. ​[Hint: There are two outflows here, today and year 1. You will need to discount the year 1 cost at the project's discount rate when calculating PV(outflows).]

Answer 1

SOLUTION:-

Present value of inflows = cash inflow*Present value of discounting factor (rate %, time period)

= 2000/1.08^5+2000/1.08^6+..........+2000/1.08^17

= 2000[1.08^5 + 2000/1.08^6..........+1/1.08^17]

= (2000*5.809511267)

= 11619.02

Present value of outflows = 15000+5000/1.08

= 11629.63

NPV = Present value of inflows - Present value of outflows

= 11619.02 - 19629.63

= (8010.61)(Approx)(Negative).

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