Question

A company would like to invest in a project. The investment cost are 100,000 at the beginning of the first year and $120,000 at the beginning of the second year. The project has a 6 year useful life. The cash inflows at the end of year 2 through 6 are $30,000;$40,000; $60,000; $60,000;$60,000, respectively. The cost of capital in year 1 through 6 are: 10%, 10%, 11%,11.5%,11.5%, 12%.

-The net present value of this project is $ ??

Answer 1

Let cost of capital be r and cash flows in year n be CF_n

Present Value of a cash flow = CF_n * PV Factor

where, PV Factor = 1/(1+r)ⁿ

Time	Outflow	Inflow	Cash Flow	Cost of Capital	PV Factor	PV
0	-100000		-100000		1.00	-100000.00
1	-120000		-120000	10.00%	0.91	-109090.91
2		30000	30000	10.00%	0.83	24793.39
3		40000	40000	11.00%	0.73	29247.66
4		60000	60000	11.50%	0.65	38819.66
5		60000	60000	11.50%	0.58	34815.84
6		60000	60000	12.00%	0.51	30397.87
					NPV	-51016.49

Hence, NPV = -$ 51016.49