Question

A project has an initial cost of $384,200 and cash inflows of $187,636, $93,496, $103,802, and $92,556, for Years 1 to 4, respectively. What is the NPV of this project if the discount rate is infinite? (Please show work. I am confused by the infinite discount rate.)

A) $158,415

B) -$93,290

C) -$384,200

D) $93,290

E) $384,200

Answer 1

When the discount rate is infinite, the future cash flows do not have any value. The value of future cash flows becomes zero even if the cash flows are very large. Technically also, one divided by infinity is equal to zero.

So the Net Present Value of the above given cash flow is only equal to the initial cost.

Note: NPV is equal to summation of the discounted values of future cash flows, ie, future cash cash flows at time t/ (1+discount rate)^t.

Here, NPV = -384,200 +0+0+0+0

So NPV = -384,200