Question

Suppose a property is expected to produce net operating cash flows annually as follows, at the end of the next five years: $15,000, $16,000, $20,000, $22,000, and $17,000. In addition, at the end of the fifth year, we will assume the property will be sold for $200,000. What is the NPV if the investor pays $180,000 using an annual discount rate of 11%? Use a financial calculator.

Answer 1

Calculation of NPV (Net Present Value)

NPV = Present Value of cash inflows – Initial Investment

Calculation of Present value of cash inflows
Year	Cash Flow in $	Type of Cash flow	Discounting Factor @ 11%	Discounted Cash flow / Present Value of Cash Flow ($)
1	15,000	Annual Cash Flow	0.900901	13,513.51
2	16,000	Annual Cash Flow	0.811622	12,985.96
3	20,000	Annual Cash Flow	0.731191	14,623.83
4	22,000	Annual Cash Flow	0.658731	14,492.08
5	17,000	Annual Cash Flow	0.593451	10,088.67
5	200,000	Terminal cash flow	0.593451	118,690.27
Total present value of cash inflows				184,394.32

Initial Investment = $ 180,000/- (provided in the question)

NPV = $184,394.32 – $180,000

         = $ 4,394.32/-

Calculation of Discounting Factor

Discount Factor = 1/ (1+R) ^N

R = Discount Rate (i.e. = 11%)

N = No of years

E.g. for year Discount Factor = 1/ (1.11)²

                                                                ⁼ 1/ (1.11) (1.11)

                                                = 0.811622