Description
Question:
A 4-year financial project is forecast to have a net cash inflow of $ 20, 000; $ 25, 000; $ 30, 000; and $ 50, 000 in the next 4 years. it will cost $ 75, 000 to implement the project, payable at the beginning of the project. If the required rate of return is 0.2, conduct a discount cash flow calculation to determine the NPV.
Answer:
Year | Cash Flow | PV Factor @ 0.2 | PV |
0 | ($ 75,000) | 1 | ($75,000) |
1 | $ 20,000 | 0.833333333 | $16,666.67 |
2 | $ 25,000 | 0.694444444 | $17,361.11 |
3 | $ 30,000 | 0.578703704 | $17,361.11 |
4 | $ 50,000 | 0.482253086 | $24,112.65 |
NPV | $501.54 |
Calculation of PV Factor:
PV factor = 1/ (1+r)n
r = Rate of interest = 0.2
n = No. of period
Year 0:
PV factor = 1/ (1 + 0.2) 0 = 1/ (1.2)0 = 1
Year 1:
PV factor = 1/ (1 + 0.2) 1= 1/ (1.2)1 = 0.833333333
Year 2:
PV factor = 1/ (1 + 0.2) 2= 1/ (1.2)2 = 1/ 1.44 = 0.694444444
Year 3:
PV factor = 1/ (1 + 0.2) 3= 1/ (1.2)3 = 1/ 1.728 = 0.578703704
Year 4:
PV factor = 1/ (1 + 0.2) 4= 1/ (1.2)4 = 1/ 2.0736 = 0.482253086
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