Question

Drongo Corporation is considering an investment with a payback of five years and a cost of $12000. If the required return is 8%, what is the worst-case NPV? Explain. Show working out.

eg, NPV = cost/(1 + required return)^t – cost

Answer 1

In worst case, total cost will be receoverd in 5th year in the given scenario

r = required return = 8%

t = 5 years

NPV = Cost / (1+r)^t - Cost

= [$12,000 /.(1+8%)^5] - $12,000

= [$12,000 / 1.46932808] - $12,000

= $8,166.99835 - $12,000

= -$3,833.00165

Therefore, Worst case NPV is -$3,833