Question

A firm is evaluating the acceptability of an investment that costs $90,000 and is expected to generate annual cash flows equal to $20,000 for the next six years. If the firm’s required rate of return is 10 percent, what is the NPV of the project? Should the project be purchased?

Answer 1

Ans.	Net present value   = Present value of cash inflow - Investment
		87106 - 90000
		-2894
	Present value of cash flow =   Annual cash inflows * Annuity of 6 years @10%
		20000 * 4.3553
		87106
	The project should not be accepted as the NPV of the project is negative.
	*Calculation of PV @10%:
	Year
	1	1 / (1 + 0.1)^1	0.9091
	2	1 / (1 + 0.1)^2	0.8264
	3	1 / (1 + 0.1)^3	0.7513
	4	1 / (1 + 0.1)^4	0.6830
	5	1 / (1 + 0.1)^5	0.6209
	6	1 / (1 + 0.1)^6	0.5645
	Annuity of 6 years @ 10%		4.3553