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A project has an initial outlay of $4,975. It has a single payoff at the end...

A project has an initial outlay of $4,975. It has a single payoff at the end of year 6 of $7,589. What is the net present value (NPV) of the project if the company’s cost of capital is 12.36 percent?

Round the answer to two decimal places.

Solutions

Expert Solution

Solution :

The Net Present Value of a project is the present value of its future cash flows minus its initial cash outlay.

Thus, Net Present Value = Present value of future Cash Inflows - Initial Cash outlay

As per the information given in the question we have

Initial Cash outlay = $ 4,975                                                                         

Single future cash inflow = $ 7,589 ; Year of cash inflow = 6   ; Discount rate = 12.36 %

The present value factor at 12.36 % discount rate in year 6 = PVF ( 12.36 % , 6 ) = 0.496969

Thus the Present value of future cash inflow = $ 7,589 * PVF( 12.36 %, 6 )

= $ 7,589 * 0.496969

= $ 3,771.497741

Thus the present value of Future cash Inflow = $ 3,771.497741

Therefore NPV is

= $ 3,771.497741 - $ 4,975

= - $ 1,203.502259

= - $ 1,203.50 ( when rounded off to two decimal places )

Thus the NPV of the project = - $ 1,203.50

jeff jeffy answered 3 months ago
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