Question

Today is January 1, 2010. Find the net present value of a project for which the initial investment of $1,160 is made today, and expected cash inflows are on January 1 in the years 2011, 2012, 2013, 2014, 2015. The first of these will be $300, and each one thereafter will be $90 higher than the preceding one. The risk-adjusted discount rate for this project is 13.0%, compounded annually. Round your answer to the nearest cent.

Answer 1

Step1: To calculate NPV, we use the formula in excel

NPV(discount rate, cash flow from 2011 to 2015) - Initial Investment

NPV(0.13,300,390,480,570,660,750) - 1160

*The cash inflow of each year increases by $90 from 2012 onwards.

Step 2:

Discount rate	13%	Jan1 2010	Jan1,2011	Jan1,2012	Jan1,2013	Jan1,2014	1-Jan-15
Time	0	1	2	3	4	5	6
Cash flow	-1160	300	390	480	570	660	750
NPV	811.63

So, NPV is $811.63 or $812.

Step 3: Since NPV>0, the project is accepted