Question

FDG company is deciding on a project investment. The project costs $91737. In year one, theres no cash flow due to construction. At end of year two, theres a $17352 cash flow. At end of year three, theres a $13482 cash flow. At end of year four, theres a $27473 cash flow. At end of year five, the project has a usage value of $20000 growing at 3% per year indefinitely. Discount rate is 9%. Calculate the npv of the project.

Answer 1

Let us first find horizon value at end of year 5

horizon value at end of year 5 = usage value of year 6/Required rate of return - growth rate

growth rate = 3%

Required rate of return = 9%

usage value of year 6 = usage value of year 5(1+ growth rate)

= 20000(1+3%)

= 20000(1.03)

= 20600

Thus horizon value at end of year 5 = 20600/ 9%- 3%

=20600/6%

=343333.33$

Statement showing NPV

Year	Cash flow	PVIF @ 9%	PV
1	0	0.9174	0.00
2	17352	0.8417	14604.83
3	13482	0.7722	10410.58
4	27473	0.7084	19462.57
5	20000	0.6499	12998.63
Horizon value	343333.33	0.6499	223143.11
Total of PV of cash inflow	280619.71
Less : Initial cash outflow	91737
NPV	188882.71

Thus NPV = 188,882.71 $