Question

A project costs $12,800 and is expected to provide a real cash inflow of $10,000 at the end of each of years 1 through 5. Calculate the net present value of this project if inflation is expected to be 4% in each year and the firm employs a nominal discount rate of 10.76%. $26,311.15 $33,522.30 $28,756.79 $33,294.07

Answer 1

Net Present Value = $28756.79

Step-by-step explanation:

First we need find the real rate of interest

Real rate of interest = (Nominal rate of interest - Inflation rate )

Real Rate of interest = (10.76% - 4%)

Real of Interest = 6.76%

Now using stream of cash flows and discount the at 6.76%

0 -12800 1.000

1 10000 0.937

2 10000 0.877

3 10000 0.822

4 10000 0.770

5 10000 0.721

Through multiplying discount value with cash flow we get the discounted value of cash flows.

0 -12800 x 1.000 = -12800

1 10000 x 0.937 = 9370

2 10000 x 0.877 = 8770

3 10000 x 0.822 = 8220

4 10000 x 0.770 = 7700

5 10000 x 0.721 = 7210

Adding the discounted cash flows we get the value of Net present value and that is equal to $28756.79