Question

What is the NPV of a project costing $250,000 with a WACC = 11%? The cash flows for this project are shown below. Should you accept or reject the project?

Year 1 $75,000

Year 2 $125,000

Year 3   $125,000

Year 4   $125,000

Year 5   $50,000

Answer 1

		Discount rate = WACC = R = 11%	Present Values
Year	Cash flows	Discount factor or PV factors = Df = 1/(1+R)^Year	PV of cash flows = Cash flows x Df
0	-$250,000.00	1.000000	-$250,000.00
1	$75,000.00	0.900901	$67,567.57
2	$125,000.00	0.811622	$101,452.80
3	$125,000.00	0.731191	$91,398.92
4	$125,000.00	0.658731	$82,341.37
5	$50,000.00	0.593451	$29,672.57
		Net Present Value = Total of Present Values =	$122,433.23

NPV = $122,433.23

As NPV is positive we should accept the project. The NPV covers the WACC or weighted average cost of the capital of 11%.