Rockmont Recreation Inc. is considering a project that has the
following cash flow and WACC data. What is the project's NPV? Note
that a project's projected NPV can be negative, in which case it
will be rejected.
WACC = 10% | |||||
Year: | 0 | 1 | 2 | 3 | |
Cash flows: | -$1,000 | $450 | $440 | $430 |
Net Present Value (NPV) of the Project
Year |
Annual Cash Flow |
Present Value factor at 10% |
Present Value of Cash Flow |
1 |
450 |
0.90909 |
409.09 |
2 |
440 |
0.82645 |
363.64 |
3 |
430 |
0.75131 |
323.07 |
TOTAL |
1,095.79 |
||
Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment
= $1,095.79 - $1,000
= $95.79
“The Net Present Value (NPV) of the Project = $95.79”
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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