Question

You are evaluating a project with initial investment (at year 0) of $240,000 that is expected to produce annual profits of $20,000 for 10 years starting at year 1. After the project ends, there is an abandonment cost of $23,000 at year 11. If your firm’s cost of capital is 11%, what is the net present value of this project?

Answer 1

Present value = sum of present value of all individual cash flows discounted at 11%

PVIF = 1/(1+r)^n where r = cost of capital = 11% and n is the year of the cash flow.

PV = cash flow*PVIF

NPV (net present value) = sum of all PVs

	a		b	c = a*b
Year	Cash flow	1+r	PVIF	PV
0	- 240,000.00	1.11	1.0000	- 240,000.00
1	20,000.00		0.9009	18,018.02
2	20,000.00		0.8116	16,232.45
3	20,000.00		0.7312	14,623.83
4	20,000.00		0.6587	13,174.62
5	20,000.00		0.5935	11,869.03
6	20,000.00		0.5346	10,692.82
7	20,000.00		0.4817	9,633.17
8	20,000.00		0.4339	8,678.53
9	20,000.00		0.3909	7,818.50
10	20,000.00		0.3522	7,043.69
11	-   23,000.00		0.3173	-      7,297.52
			Total	-129,512.88

Thus NPV = -$129,512.88