Question

A project cost 14,500 today. If you invest in this project, you expect to receive 3,400 one year from now, 6,500 two years from now, and 9,000 years from now. No other cash flow will occur. Assume the applicable discount rate is 18%.

A. What is the net percent value of the project.

B. should you invest in this project (yes or no)

C instead of 14,500. What would the project have to cost in order that npv=0?

Answer 1

Solution :-

(a) Net Present value of the Project =

= - $14,500 + [ $3,400 / (1+0.18) ] + [ $6,500 / (1+0.18)² ] + [ $9,000 / ( 1+0.18)³ ]

= - $14,500 + [ $3,400 * 0.847 ] + [ $6,500 * 0.718 ] + [ $9,000 * 0.609 ]

= - $14,500 + $13,027.23

= - $1,472.77

(b) As the NPV of the project is negative so there is no need to invest in the project

(C) The project would have to cost in order that npv=0

= $14,500 - $1472.77

= $13,027.23

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