Question

Blink of an Eye Company is evaluating a 5-year project that will provide cash flows of $34,100, $53,910, $62,130, $59,820, and $42,780, respectively. The project has an initial cost of $147,200 and the required return is 7.9 percent. What is the project's NPV?

Answer 1

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

First we will calculate the present value of future cash flows as per below:

Here we will use the following formula:

PV = FV / (1 + r%)n

where, FV = Future value, PV = Present value, r = rate of interest = 7.9%, n= time period

For calculating the present value the given cash flows, we will calculate the present values of all the years and add them up. Now,putting the values in the above equation, we get,

PV = $34100 / (1 + 7.9%) + $53910 / (1 + 7.9%)2  + $62130 / (1 + 7.9%)3 + $59820 / (1 + 7.9%)4 + $42780 / (1 + 7.9%)5

PV = $34100 / (1 + 0.079) + $53910 / (1 + 0.079)2  + $62130 / (1 + 0.079)3 + $59820 / (1 + 0.079)4 + $42780 / (1 + 0.079)5

PV = $34100 / (1.079) + $53910 / (1.079)2  + $62130 / (1.079)3 + $59820 / (1.079)4 + $42780 / (1.079)5

PV = $31603.34 + ($53910 / 1.164241)  + ($62130 / 1.256216) + ($59820 / 1.3554571) + ($42780 / 1.46253821)

PV = $31603.34 + $46304.85 + $49458.05 + $44132.713 + $29250.5178

PV = $200749.47

So, required present value is $200749.47

Now, we will calculate the NPV,

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

Initial investment = $147200

Putting the values in the above formula, we get,

Net Present value (NPV) = $200749.47 - $147200 = $53549.47