Question

Project L requires an initial outlay at t = 0 of $40,000, its expected cash inflows are $15,000 per year for 9 years, and its WACC is 11%. What is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Net Present value (NPV) is the present value of future cash inflows minus the initial investment.

For project L, the cash inflow will be same every year, so it is an annuity. For calculating the present value of annuity, we will use the following formula:

PVA = P * (1 - (1 + r)^-n / r)

where, P is the periodical amount = $15000, r is the rate of interest = WACC = 11% and n is the time period = 9

Now, putting these values in the above formula, we get,

PVA = $15000 * (1 - (1 + 11%)^-9 / 11%)

PVA = $15000 * (1 - (1 + 0.11)^-9 / 0.11)

PVA = $15000 * (1 - (1.11)^-9 / 0.11)

PVA = $15000 * (1 - 0.39092477144) / 0.11)

PVA = $15000 * (0.60907522856 / 0.11)

PVA = $15000 * 5.53704753237

PVA = $83055.71

Present value of future cash flows = $83055.71

Initial investment (given) = $40000

Net Present value (NPV) = Present value of future cash inflows - initial investment

Net Present value (NPV) = $83055.71 - $40000 = $43055.71