Question

You are a director of a small firm that intent to invest 1 000 000 in a new mobile app for it's operation and a quarter of of millions rand of the four year of its lunch. What will be the net present value if the firm anticipates inflow of 7 00 000 each for five years. The rate of return is 12%. Do you think this is viable project and why?. Show all calculations

Answer 1

As per the question we take out the following details:

Outflow at 0 Year = 1,000,000 rand

Outflow at 4 Year = 250,000 rand

Inflow of 700,000 each for 5 years.

Net Present Value (NPV) = Present Value of Inflows – Present Value of Outflows

PV Inflows =

                  = 2,523,343.34

PV Outflows =

                      = 1,158,879.52

NPV     = PV Inflows – PV Outflows

            =   2,523,343.34 - 1,158,879.52

          = 1,364,463.82

Conclusion:

The Project must be accepted as the NPV is positive.

The general rule for decision making is

NPV +ve then Accept

NPV –ve then Reject

NPV = 0 then we are indifferent.