Question

QUESTION 10 The discount rate is 5% per annum, and there is project that requires an initial investment of $25 million. If this project earns $5 million in Yr 1, $12 million in Yr 2 and $7 million in Yr 3, what is the net present value of the project?

- 5.47 million dollars

- 2.14 million dollars

+ 3.31 million dollars

- 3.31 million dollars

Answer 1

NPV :
NPV is the difference between Present value of Cash Inflows and Present value of cash outflows.

NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Year	CF	PVF @5 %	Disc CF
0	$ -25,000,000.00	1.0000	$ -25,000,000.00
1	$     5,000,000.00	0.9524	$     4,761,904.76
2	$ 12,000,000.00	0.9070	$ 10,884,353.74
3	$     7,000,000.00	0.8638	$     6,046,863.19
NPV			$   -3,306,878.31

NPV is -3.31 Million

OPtion D is correct.