Question

Assume project cost is $25,000 with cash flows of $8,000/yr for 5 years; WACC = 10%. What is the project's NPV?

Group of answer choices

$2,945

$5,326

$7,235

$3,887

Answer 1

NPV = Net Present Value = Present Values of Cash Inflows - Initial Investment, where the cash flows are discounted at WACC

given

WACC = 10 %

Initial Investment = $ 25000

Present Values of Cash Flows is computed using the formula = Cash Flows /(1+R)^n where R is the Discount Rate and n is the no of years.

Therefore Present Values of Cash Inflows = $8000/(1.10)^1 +  $8000/(1.10)^2 + $8000/(1.10)^3 + $8000/(1.10)^4 + $8000/(1.10)^5 = $ 30326

NPV = $ 30326 - $ 25000 = $ 5326