Question

What is the NPV of a project that costs $37,000 today and is expected to generate annual cash inflows of $9,000 for the next 7 years, followed by a final inflow of $15,000 in year 8. Cost of capital is 7.6%. Round to the nearest cent.

Answer 1

Net Present Value (NPV) for the Project

Year	Annual cash flows ($)	Present Value Factor (PVF) at 7.60%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	9,000	0.929368	8,364.31
2	9,000	0.863725	7,773.52
3	9,000	0.802718	7,224.47
4	9,000	0.746021	6,714.19
5	9,000	0.693328	6,239.95
6	9,000	0.644357	5,799.21
7	9,000	0.598845	5,389.60
8	15,000	0.556547	8,348.20
TOTAL			55,853.46

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

= $55,853.46 - $37,000

= $18,853.46

“Hence, the Net Present Value (NPV) for the Project will be $18,853.46”

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.