Question

Calculate the NPV of a project that has an outlay of $200,000 and has annual net cash flows of $50000 per year over 6 years. The project has a salvage value (disposal value) of 10% of its original value. The required rate of return for projects of similar risk is 0.1.

Note that the rate of return is quoted as a decimal, e.g. 12% p.a. is written as .12 in the question above. Your answer must be accurate to the nearest dollar. Do not enter the $ sign when entering your answer. If your NPV is negative enter a minus sign before typing your answer, e.g. -2345.

Answer 1

Net Present Value (NPV) for the Project

Period	Annual Cash Flow ($)	Present Value factor at 10%	Present Value of Cash Flow ($)
1	50,000	0.90909	45,455
2	50,000	0.82645	41,322
3	50,000	0.75131	37,566
4	50,000	0.68301	34,151
5	50,000	0.62092	31,046
6	50,000	0.56447	28,224
6	20,000	0.56447	11,289
TOTAL			2,29,053

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

= $2,29,053 - $200,000

= $29,053

“Therefore, the Net Present Value (NPV) for the Project would be $29,053”

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.