Question

Let's examine your ability to calculate NPV. Let's assume a piece of equipment has an implied discount rate of 8% and an initial cost of $1,000,000. The piece of equipment is expected to generate positive cash flows in years 1-3 of $150,000 and years 4-6 of $200,000 and $300,000 in year 7. Let's also assume that you have to spend $150,000 in year 4 in order to maintain this piece of equipment. What is the project's NPV? (ignoring income taxes). (Be sure to show your work!) (This question is worth 3 points and an incorrect response or unanswered initial response will result in 0 points assigned)

Answer 1

Present value of cash outflow :Initial investment + [PVF 8%,4 * Cash outlfow 4]

                     = 1,000,000 + [.73503*150000]

                     = 1,000,000 + 110,254.5

                   = $ 1,110,254.5

Present value of cash inflow [PVA 8%,1-3*CF1]+[PVF8%,4-6 *CF2]+[PVA 8%,7 *CF3]

                = [2.57710*150000]+ [ 2.04578*200000]+[.58349* 300000]

                 = 386565+ 409156+ 175047

                  = $ 970768

NPV = present value of cash inflow -Present value of cash outflow

         = 970768- 1,110,254.5

           = - 139,486.50     [rounded to139487]