Question

Your firm is considering a project that costs $67,277. This opportunity will provide cash flows of $20,706, $24,210, $20,287, and $24,022 over the next four years. Your firm has a required rate of return of 14%.

What is the project's npv?

Answer 1

Calculation of NPV (Net Present Value)

Answer: NPV = -$2,568.96

NPV = Present Value of future cash inflows – Initial Investment

Calculation of Present value of cash inflows for project

Year	Cash Flow	Present Value Factor @ 14% (Required rate of return)	Present Value of cash flow
(I)	(II)	(III)	(II) * (III)
1	$20,706	0.87719	$18,163.10
2	$24,210	0.76947	$18,628.87
3	$20,287	0.67497	$13,693.12
4	$24,022	0.59208	$14,222.95
Present Value of the Cash flows inflows			$64,708.04

Initial Investment =$67,277/- (provided in the question)

NPV = $64,708.04 – $67,277.

                     = -$2,568.96

Calculation of Discounting Factor (Present Value Factor)

Discount Factor = 1/ (1+R) ^N

R = Discount Rate (i.e. = 14%)

N = No of years

E.g. for year 2 Discount Factor = 1/ (1.14)²

                                                                ⁼ 1/ (1.14) (1.14)

                                                =0.76947