Question

Third State Bank wants to add a new branch office. It has determined that the cost of construction of the new facility will be $1.5 million with another $500,000 in organizational costs. The bank has estimated that it will generate $319,522 per year in net revenues for 20 years. If Third State requires a 17% return on its money, what is this project's net present value?

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.

Particulars	Values
Initial Outflow	$      -2,000,000.00
Start Year	1
End Year	20
Disc Rate	17.00%
Cash Flow per anum	$           319,522.00

Year	Cash Flow	PVF @17 %	Disc CF
0	$         -2,000,000.00	1.0000	$        -2,000,000.00
1 - 20	$              319,522.00	5.6278	$         1,798,195.47
NPV			$           -201,804.53

PVAF = SUm [ PVF(r%, n) ]
PVF(r%, n) = 1 / ( 1 + r)^n
r = Int rate per period
n = No. of periods

How to calculate PVAF using Excel:
=PV(Rate,NPER,-1)
Rate = Disc Rate
NPER = No.of periods