Question

# Calculate the NPV of a project that has an outlay of \$200,000 and has annual net...

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.

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.

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