Question

If the discount rate is 10% and the cost of a project is $100 investment today with an expected payoff of $50 at the end of year 1 and an expected payoff $80 in year 2, should the project be undertaken?

Answer 1

Yes, the project should be accepted.

Step-by-step explanation:

We will calculate Net Present Value (NPV) of the project. For that cash inflows will be discounted at the rate given i.e. 10%

Current outflow = $100

Inflow at end of year 1 = $50, discounted value =

`{(1)/(1+0.1)^1` X $50 = $45.45

Inflow at end of year 2 = $80, discounted value =

`{(1)/(1+0.1)^2` X $80 = $66.115

NPV = Net inflow - Net outflow = $45.45 + $66.115 - $100 = $11.565

Since NPV is positive,

The project should be accepted.