Question

This question is based on the following cash flows

C0=$10,000	I1=$2,000	I2=$2,000	I3=$3,000	I4=$3,000	I5=$2,500		L=$1,000
0	1	2	3	4	5

C: Cost, I: Income, L: Salvage

The escalation rate is 10% per year in this example.

Calculate the NPV of this investment assuming an escalated dollar minimum rate of return of 8%

Answer 1

Step-1:Calculation of escalated value of cash flows
Year	Cash flows without escalation			Cash flows with escalation
0	$       -10,000	x	1.1^ 0	$ -10,000.00
1	2,000	x	1.1^ 1	2,200.00
2	2,000	x	1.1^ 2	2,420.00
3	3,000	x	1.1^ 3	3,993.00
4	3,000	x	1.1^ 4	4,392.30
5	2,500	x	1.1^ 5	4,026.28
5	1,000	x	1.1^ 5	1,610.51
Step-2;Calculation of NPV
Year	Cash flow	Discount rate		Present Value
a	b	c=1.08^-a		d=b*c
0	$ -10,000.00	1.0000		$ -10,000.00
1	2,200.00	0.9259		2,037.04
2	2,420.00	0.8573		2,074.76
3	3,993.00	0.7938		3,169.77
4	4,392.30	0.7350		3,228.47
5	4,026.28	0.6806		2,740.22
5	1,610.51	0.6806		1,096.09
	NPV			$      4,346.34