Question

Middlefield Motors is evaluating a project that would cost 4,000 dollars today. The project is expected to have the following other cash flows: 2,550 dollars in 1 year, -2,330 dollars in 3 years, and 6,320 dollars in 4 years. The cost of capital of the project is 7.09 percent. What is the net present value of the project?

Answer 1

present value factor = 1 / (1+r)^n

here,

r = 7.09%

=>0.0709.

n = 0,1,3,4.

The following is the calculation of NPV;

year	cash flow	present value factor	cash flow * present value factor
0	-4000	1/(1.0709)^0=>1	-4000*1=>-4,000
1	2,550	1/(1.0709)^1=>0.93379401	(2550*0.933799401)=>2,381.17
3	-2,330	1/(1.0709)^3=>0.81424153	(-2330*0.81424153)=>-1,897.18
4	6,320	1/(1.0709)^4=>0.76033386	(6320*0.76033386)=>4,805.31
		NPV	1,289.30