Question

1. You are an investor evaluating a project which is going to take 8 years. The project will pay $500,000 at the beginning of each year starting a year from now. These payments will grow at 2% for the first two years, then 3.5% for the following two years and then stay consistent at 4% until the end of the project. In the last year of the project you will receive a lump sum of $1 million while also paying a lump sum of $200,000. If your expected retrun on this project is 12.5%, what is the PV of the project?

Answer 1

Year	Cash flow	× discount rate	Present value
0	$                   -	1.0000	$                            -
1	$        500,000	0.8889	$           444,444.44
2	$        510,000	0.7901	$           402,962.96
3	$        517,500	0.7023	$           363,456.79
4	$        527,850	0.6243	$           329,534.16
5	$        530,400	0.5549	$           294,334.32
6	$        538,200	0.4933	$           265,478.01
7	$        548,964	0.4385	$           240,700.07
8	$    1,200,000	0.3897	$           467,693.21
NPV			$        2,808,603.96

Present value is $2,808,603.96