Question

In: Accounting

Calculate NPV for a project with a period of 10 years, opportunity cost is 14%. a....

Calculate NPV for a project with a period of 10 years, opportunity cost is 14%.

a. Initial investment USD 10,000 and cash inflows each year is USD 2,000

b. Initial investment USD 25,000 and cash inflows each year is USD 3,000

c. Initial investment USD 30,000 and cash inflows each year is USD 5,000

Expert Solution

The formula for NPV is: Present value of cash inflow - Present value of cash outflow

Now we have to know the formula for calculating the present value of an annuity.

So the formula for calculating PV of an annuity is:

PV of Annuity=C×[1−(1+i)⁻ⁿ] / i

A=annuity per period

i=interest rate

n=number of payments

PV of Annuity= Annuity * PVIFA for i rate for n years

In the given question period is 10years and the interest rate/discounting rate is 14 %.

So first we will calculate PVIFA for 10 years at 14% discounting rate. and which is 5.2161( from above formula or you can calculate it on excel)

a. Initial investment USD 10,000 and cash inflows each year is USD 2,000:

NPV = 2000*PVIFA - 10000

= 2000*5.2161 -10000

=10432.2-10000

= USD 432.2

b. Initial investment USD 25,000 and cash inflows each year is USD 3,000

NPV = 3000*PVIFA - 25000

= 3000*5.2161 -25000

=15648.3-25000

= USD (9351.7) [negative]

c. Initial investment USD 30,000 and cash inflows each year is USD 5,000

NPV = 5000*PVIFA - 30000

= 5000*5.2161 -30000

=26080.5-30000

= USD (3919.5) [negative]

ekkarill92 answered 2 years ago

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