In: Finance
Small Effect Corp is considering investing $70 million in a new factory that will generate net monthly cash flows beginning four months from today. The first cash flow will equal $2 million and subsequent cash flows will shrink by 1% each through the final cash flow which will occur four years and 1 month from today. The project’s cost of capital equals 12.5% per year. Set up the calculations needed to determine the net present value of factory.
Discount rate per month = discount rate per year/12 = 12.5/12 = 1.0417%
Discount Factor = 1/(1 + Disount rate per month)^Month
NPV = Sum of all PV
Discount Rate per year | 12.50% | ||
Discount Rate per month | 1.0417% | ||
Month | Cash Flow | Discount Factor | PV |
0 | -70000000 | 1 | -70000000 |
1 | 0 | 0.989690722 | 0 |
2 | 0 | 0.979487725 | 0 |
3 | 0 | 0.969389913 | 0 |
4 | 2000000 | 0.959396202 | 1918792.405 |
5 | 1980000 | 0.94950552 | 1880020.93 |
6 | 1960200 | 0.939716803 | 1842032.878 |
7 | 1940598 | 0.930029001 | 1804812.42 |
8 | 1921192.02 | 0.920441073 | 1768344.045 |
9 | 1901980.1 | 0.91095199 | 1732612.557 |
10 | 1882960.299 | 0.901560732 | 1697603.066 |
11 | 1864130.696 | 0.892266292 | 1663300.984 |
12 | 1845489.389 | 0.88306767 | 1629692.015 |
13 | 1827034.495 | 0.87396388 | 1596762.156 |
14 | 1808764.15 | 0.864953943 | 1564497.684 |
15 | 1790676.509 | 0.856036892 | 1532885.153 |
16 | 1772769.743 | 0.847211769 | 1501911.391 |
17 | 1755042.046 | 0.838477628 | 1471563.491 |
18 | 1737491.626 | 0.829833528 | 1441828.806 |
19 | 1720116.709 | 0.821278543 | 1412694.946 |
20 | 1702915.542 | 0.812811754 | 1384149.769 |
21 | 1685886.387 | 0.804432252 | 1356181.382 |
22 | 1669027.523 | 0.796139136 | 1328778.13 |
23 | 1652337.248 | 0.787931516 | 1301928.592 |
24 | 1635813.875 | 0.77980851 | 1275621.581 |
25 | 1619455.736 | 0.771769247 | 1249846.135 |
26 | 1603261.179 | 0.763812863 | 1224591.512 |
27 | 1587228.567 | 0.755938504 | 1199847.189 |
28 | 1571356.282 | 0.748145324 | 1175602.854 |
29 | 1555642.719 | 0.740432485 | 1151848.404 |
30 | 1540086.292 | 0.732799161 | 1128573.942 |
31 | 1524685.429 | 0.72524453 | 1105769.767 |
32 | 1509438.574 | 0.717767782 | 1083426.378 |
33 | 1494344.189 | 0.710368115 | 1061534.464 |
34 | 1479400.747 | 0.703044732 | 1040084.901 |
35 | 1464606.739 | 0.695796848 | 1019068.753 |
36 | 1449960.672 | 0.688623685 | 998477.2605 |
37 | 1435461.065 | 0.681524471 | 978301.8437 |
38 | 1421106.455 | 0.674498446 | 958534.0951 |
39 | 1406895.39 | 0.667544854 | 939165.7773 |
40 | 1392826.436 | 0.660662948 | 920188.8193 |
41 | 1378898.172 | 0.65385199 | 901595.3133 |
42 | 1365109.19 | 0.647111248 | 883377.5111 |
43 | 1351458.098 | 0.640439998 | 865527.8212 |
44 | 1337943.517 | 0.633837523 | 848038.8054 |
45 | 1324564.082 | 0.627303116 | 830903.1759 |
46 | 1311318.441 | 0.620836074 | 814113.7922 |
47 | 1298205.257 | 0.614435702 | 797663.6578 |
48 | 1285223.204 | 0.608101313 | 781545.9179 |
49 | 1272370.972 | 0.601832227 | 765753.8561 |
NPV | -12170603.67 |