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?

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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