A project will continue for 5 years with expected net cash flow of $18,256 per year over its life. Required rate of return from this project is 12%. The project requires initial investment of $53,448.
Using the above data, calculate the
Net Present Value Calculation:
Present value foe each year's cash flow = Cash flow for each year/(1+ rate of return)^time
PV(t=1) = 18256/(1+0.12)^1
PV(t=2) = 18256/(1+0.12)^2
PV(t=3) = 18256/(1+0.12)^3
PV(t=4) = 18256/(1+0.12)^4
PV(t=5) = 18256/(1+0.12)^5
Rate of Return | 12% | ||||||
Years | 0 | 1 | 2 | 3 | 4 | 5 | |
Cashflow | -53448 | 18256 | 18256 | 18256 | 18256 | 18256 | |
PV | -53448 | 16300 | 14553.57 | 12994.26 | 11602.02 | 10358.94 |
So, Net Present Value =
NPV = -initial Investment + Sum of [Present Values of all cash inflows]
NPV = -53448 + 65808.79 = 12360.79
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