Question

A firm with a 9.5 percent cost of capital is considering a project for this year’s capital budget. The project’s expected after-tax cash flows are as follows:

Year:	0	1	2	3	4
Cash flow:	-$7,000	$3,200	$2,700	$2,900	$3,400

Calculate the project’s net present value (NPV).

	a.	$2,509.55
	b.	$2,747.95
	c.	$5,200.00
	d.	$1,486.01
	e.	$4,141.55

Answer 1

NPV = - Investment + Present value of cash inflows

NPV = - 7000 + 3200/(1+9.5%)^1 + 2700/(1+9.5%)^2 + 2900/(1+9.5%)^3 + 3400/(1+9.5%)^4

NPV = -7000 + 2,922.37 + 2,251.83 + 2,208.80 + 2,364.95

NPV = 2747.95

.

Correct option is > b. $2,747.95

Working below for NPV = $2,747.95

	Discount rate = R =	9.50%	Present Values (PV)
Year	Cash flows	Discount factor or PV factors = Df = 1/(1+R)^Year	PV of cash flows = Cash flows x Df
0	-$7,000.00	1.000000	-$7,000.00
1	$3,200.00	0.913242	$2,922.37
2	$2,700.00	0.834011	$2,251.83
3	$2,900.00	0.761654	$2,208.80
4	$3,400.00	0.695574	$2,364.95
		Total of PV = NPV =	$2,747.95