Question

You are considering an investment opportunity with the following costs and benefits. The applicable interest rate for this investment opportunity is 5% (effective annual rate). Calculate the NPV of this investment opportunity.

Year	0	1	2	3	4	5	6
Cost	$ (10,000)	$ (5,000)	$ (1,000)	$ -	$ -	$ -	$ -
Benefits	$ -	$ -	$ 5,000	$ 7,500	$7,500	$ 5,000	$ 1,000

Answer 1

NPV :
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Year	CF	PVF @5 %	Disc CF
0	$ -10,000.00	1.0000	$ -10,000.00
1	$   -5,000.00	0.9524	$   -4,761.90
2	$    4,000.00	0.9070	$    3,628.12
3	$    7,500.00	0.8638	$    6,478.78
4	$    7,500.00	0.8227	$    6,170.27
5	$    5,000.00	0.7835	$    3,917.63
6	$    1,000.00	0.7462	$        746.22
NPV			$    6,179.11

PVF (r%, n) = 1 / ( 1 + r )^n

r = Disc rate

n = Time period.