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a project has a cost of 10000$ and the cost of capital is 12% what is...

a project has a cost of 10000$ and the cost of capital is 12% what is the net present value given that the cash flow from the project of next four years is 3500$ each year

Solutions

Expert Solution

> Concept

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.

> Formula

NPV = Present Value of Cash inflow ( PVCI ) - Present Value of Cash outflow ( PVCO )

> Calculation

  • PVCO = Project Cost

                      = $ 10000

  • PVCI = Cash inflow Per annum * PVAF ( r, n)

                    = 3500 * PVAF(12%, 4)

                    = 3500 * [ 1/1.12 + 1/1.122 + 1/1.123 + 1/1.124 ]

                    =3500 * 3.03735

                   = $ 10630.72

  • NPV = PVCI - PVCO

                   = 10630.72 - 10000

                  = $ 630.72 Answer

Hope you understand the solution.

jeff jeffy answered 1 year ago
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