Question

Oxygen optimization is considering a project that is expected to cost 6,261 dollars today; produce a cash flow of 14,584 dollars in 7 years, and have an NPV of 361 dollars. What is the cost of capital for the project? Answer as a rate in decimal format so that 12.34 would be entered as .1234 and 0.98% would be entered as .0098.

Answer 1

Given,

Cost = $6261

Cash flow in 7 years = $14584

NPV = $361

No. of years (n) = 7

Solution :-

Let cost of capital be 'r'

NPV = [cash flow in 7 years (1 + r)ⁿ] - cost

$361 = [$14584 (1 + r)⁷] - $6261

$361 + $6261 = $14584 (1 + r)⁷

$6622 = $14584 (1 + r)⁷

(1 + r)⁷ = $14584 $6622

(1 + r)⁷ = 2.20235578375

1 + r = (2.20235578375)^1/7

1 + r = 1.1194

r = 1.1194 - 1 = 0.1194

So, cost of capital for the project is 0.1194