Question

4. You have a fourth project that will cost 1700 to invest in one year from now, will generate a cash inflow of 150 starting in year three and continuing forever. If the discount rate is 8%, what is the NPV and should you accept the project based on the NPV?

Please show all of your work

Answer 1

Present value of perpetuity = perpetual payment / discount rate

NPV = present value of cash inflows - initial investment

present value of cash inflows 2 years from now =  $150 / 8% = $1,875

Present value = future value / (1 + discount rate)^{number of years}

NPV of project 1 year from now = ($1,875 / (1 + 8%)¹) - $1,700

NPV of project 1 year from now = $36.11

Present value = future value / (1 + discount rate)^{number of years}

NPV of project today =  $36.11 / (1 + 8%)¹

NPV of project today =  $33.44

Yes, you should accept the project because the NPV is positive