What is the NPV for the following project if its cost of capital is 15 percent...

What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $2,000,000 in year 1, $2,000,000 in year 2, $2,000,000 in year 3 and $1,410,000 in year 4?

a. 1,700,000

b. 372622

c.-137,053

d. none of the above

Solutions

Expert Solution

D. NONE OF THE ABOVE

Present Value Of Cash Inflows (PVIFA) ₹ 57,09,957

Net Present Value (NPV) ₹ 7,09,957

What is Net Present Value (NPV)?

NPV is a simple yet an important tool that shows the difference between the present value of future cash flows and the amount of current investment. The present value of your expected cash flow is derived by discounting them at a certain rate of return. NPV is an easy-to-use and simple to understand the tool and is a popular cash budgeting technique which is used to evaluate the suitability of investments and projects. An in-depth understanding of this concept helps to make sound investment decisions. In short, NPV is the residue obtained after deducting the present value of cash outflow from the present value of cash inflow. It is a comprehensive evaluation technique as it takes into account the effect of time on cash flows. It discounts the future cash flows to show its value in the present context.

How is NPV calculated?

NPV tells you whether a certain project will generate cash flows according to your expectations or not. Using an assumed rate of return and investment horizon, it brings to light any adjustments required in your current investment to achieve a positive return.

NPV can be calculated by using the following formula:

NPV = [Cn/(1+r)^n], where n={0-N}

Where

Cn = difference of cash flows

r = discount rate

n = time in years

You need to follow selection criteria with regards to the usage of NPV. Calculation of NPV will result in three possible outcomes:

a.Positive NPV: In this situation, the present value of cash inflows is greater than the present value of cash outflows. This is an ideal situation for investment

b.Negative NPV: In this situation, the present value of cash inflows is less than the present value of cash outflows. This is not an ideal situation and any project with this NPV should not be accepted.

c.Zero NPV: In this situation, the present value of cash inflows equals the present value of cash outflows. You may or may not accept the project.

jeff jeffy answered 4 months ago

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