Question
In: Finance
If the discount rate changes from 12% to 15%, what is the CHANGE in the NPV of the project approximately?
A project has the following cash flows:
| Year 0 | Year 1 | Year 2 | Year 3 | |
| Cash flow | -100.000 | 70.000 | 120.000 | 200.00 |
If the discount rate changes from 12% to 15%, what is the CHANGE in the NPV of the project approximately?
Please no excel sheet, just detailed steps for someone new in finance ;)
Solutions
Expert Solution
Answer : Calculation of Change in Net Present Value if Discount rate changes from 12% to 15%
Net Present Value = Present Value of Cash Inflow - Present Value of Cash Outflow
Below is the table showing calculation of NPV when Discount rate is 12%
| Year | Cash Inflow (A) | Present Value Factor @12%[1/(1+0.12)^n] Put n as 1,2,3 respectively..(B) | Present value of cash inflow (A)*(B) |
| 1 | 70 | 0.892857143 | 62.5 |
| 2 | 120 | 0.797193878 | 95.66326531 |
| 3 | 200 | 0.711780248 | 142.3560496 |
| Total Present value of cash inflow | 300.5193149 | ||
| Less : Cash outflow | 100 | ||
| Net Present Value | 200.52 |
Below is the table showing calculation of NPV when Discount rate is 15%
| Year | Cash Inflow(A) | Present Value Factor @15%[1/(1+0.15)^n] Put n as 1,2,3 respectively..(B) | Present value of cash inflow (A)*(B) |
| 1 | 70 | 0.869565217 | 60.86956522 |
| 2 | 120 | 0.756143667 | 90.73724008 |
| 3 | 200 | 0.657516232 | 131.5032465 |
| Total Present value of cash inflow | 283.1100518 | ||
| Less : Cash outflow | 100 | ||
| Net Present Value | 183.11 |
Therefore if Discount rate changes from 12% to 15% then NPV will decrease by approx 17.41 (200.52 - 183.11)
jeff jeffy answered 2 years agoRelated Solutions
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