Question

What is the NPV of a project that costs $80,000 today and cash inflows $45,000 annually for three years from today if the opportunity cost of capital is 14?

Answer 1

Pls find below workings and answer:

NPV of this project is $ 24473.44; Since this is a positive NPV, the project is recommended.

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;