Question

A firm invests $35,000 in a piece of equipment which will bring in savings of $10,000 per year for six years. At the required rate of return of 12 percent, what is the present value of this project?

Answer 1

Present Value of the Project

Present Value of the Project is the Discounted Value of the future annual cash inflows

Year	Annual Cash Inflows ($)	Present Value factor at 12%	Present Value of Cash Inflow ($)
1	10,000	0.89286	8,928.57
2	10,000	0.79719	7,971.94
3	10,000	0.71178	7,117.80
4	10,000	0.63552	6,355.18
5	10,000	0.56743	5,674.27
6	10,000	0.50663	5,066.31
TOTAL			41,114.07

Net Present Value (NPV)

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $41,114.07 - $35,000

= $6,114.07

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.

“The Present Value of this Project would be $41,114.07”