Question

Find the NPV of an asset which costs $100,000, and is expected to generate net cash flows of $50,000 for each of the next three years. The discount rate is 12%. Indicate whether the asset should be purchased.

Answer #1

Ans The Asset should be purchased since NPV is positive

Year | Project Cash Flows (i) | DF@ 12% | DF@ 12% (ii) | PV of Project A ( (i) * (ii) ) |

0 | -100000 | 1 | 1 | (1,00,000.00) |

1 | 50000 | 1/((1+12%)^1) | 0.893 | 44,642.86 |

2 | 50000 | 1/((1+12%)^2) | 0.797 | 39,859.69 |

3 | 50000 | 1/((1+12%)^3) | 0.712 | 35,589.01 |

NPV | 20,091.56 |

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