Question

Calculate the net present value ?(NPV?) for a 15?-year project with an initial investment of ?$15,000...

Calculate the net present value ?(NPV?) for a 15?-year project with an initial investment of ?$15,000 and a cash inflow of ?$2,000 per year. Assume that the firm has an opportunity cost of 15?%.

Comment on the acceptability of the project.

The? project's net present value is $ .

?(Round to the nearest? cent.)

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Answer #1

Net present value(NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

In this question, initial investment = $15,000

Cash inflow for 15 years = $2,000

Assume this cash inflow for 15 years to be an annuity at 15% opportunity cost, and we need to calculate its present value. PV of an annuity is mathematically represented as:

PV = 2000 * 5.8474 = $11,694.74

Net Present Value = Initial Investment Outflow + PV of cuture cash inflows

Net Present Value = -15,000 + 11,694.74 = - $3,305.26

Hence, the NPV of project = - $3,305.3

Negative NPV suggests that the project if taken, will deplete the value of firm. Hence, the firm should not be selected.

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