Question

You've estimated the following cash flows (in $ million) for two mutually exclusive projects:

Year	Project A	Project B
0	-29	-45
1	30	45
2	40	50
3	50	50

The appropriate discount rate is 9%.

Part 1

What is the NPV of project A (in $ million)?

Part 2

What is the NPV of project B (in $ million)?

Answer 1

Part 1 – Net Present Value (NPV) of PROJECT A

Year	Annual Cash Flow ($ in Million)	Present Value factor at 9%	Present Value of Cash Flow ($ in Million)
1	30	0.91743	27.52
2	40	0.84168	33.67
3	50	0.77218	38.61
	TOTAL		99.80

Net Present Value = Present Value of the annual cash inflows - Initial Investment

= $99.80 Million - $29 Million

= $70.80 Million

Part 2 – Net Present Value (NPV) of PROJECT B

Year	Annual Cash Flow ($ in Million)	Present Value factor at 9%	Present Value of Cash Flow ($ in Million)
1	45	0.91743	41.28
2	50	0.84168	42.08
3	50	0.77218	38.61
	TOTAL		121.98

Net Present Value = Present Value of the annual cash inflows - Initial Investment

= $121.98 Million - $45 Million

= $76.98 Million

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.