Question

A project costs $500,000 upfront and has the following cash flows: year 1. $100,000 year 2....

A project costs $500,000 upfront and has the following cash flows: year 1. $100,000 year 2. $200,000 year 3. $300,000 year 4. $450,000 year 5. $550,000 calculate the NPV using an 11% discount rate. If this project is independent of other projects the company is considering and the firm has enough funds, should this project be accepted?

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Answer #1

A project should be accepted if the NPV of the project is greater than or equal to zero

In the given case, outflow =$500000 upfront

Hence present value (PV) of outflow = $ 500000

Present value of inflow =Sum of all Inflow / (1+discount rate)^n

Where n=number of years

Here, PV of inflow = $ 100000/1.11 +200000/(1.11)^2+300000/(1.11)^3 +450000/(1.11)^4 +550000/(1.11)^5

=$ 90090.09+ 162324.48+219357.41+296428.94+326398.23 =$10,94,599.16

NPV=Pv of inflow -PV of outflow= $ (1094599.16-500000)= $ 594599.16

Since NPV is positive, the project should be accepted.

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