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An investment project has the following cash flows: Initial investment of $1,000,000 and cash flows starting...

An investment project has the following cash flows: Initial investment of $1,000,000 and cash flows starting in the first year through year 4 of $300,000 each. If the required rate of return is 12% What is the present value for each cash flow? What is the NPV and what decision should be made using the NPV?

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Answer #1

Answer : Calculation of Present Value of Cash Flows and NPV

NPV = Present Value of Cash Inflow - Present Value of Cash Outflow

Present Value of Cash Inflows

Year Cash Flows PVF @12% Discounted Cash Flows
1 300,000 0.89285714285 267,857.142855
2 300,000 0.79719387754 239,158.163262
3 300,000 0.7117802478 213,534.07434
4 300,000 0.63551807839 190,655.423517
Total 911,204.803974

Present Value of Cash Outflow = $1,000,000

Calculation of NPV

NPV = 911,204.803974 - 1,000,000

= (- 88795.19603) or (-88795.20)

As the project has negative NPV therefore the project should not be accepted.

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