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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