Question

i would like to expand my business by creating a new production line. today, i hired a consultant to plan the project, at a cost of 200,000. in the first year, i spent $800,000 on new machinery. in the second year, i made $125,000. in the third year, i made $200,000. in the fourth year, i made $360,000. in the fifth year, i made $620,000. during years 6-8, i made $540,000 each year. assuming a discount rate of 7.1%, what was the npv of this project?

Answer 1

The Net Present Value (NPV) of the project is $1,294,351.10.

Step-by-step explanation:

To calculate the Net Present Value (NPV) of the project, we need to discount the future cash flows to their present value and subtract the initial investment.

Using a discount rate of 7.1%, we can calculate the present value of each cash flow:

• Year 1: $800,000 / (1 + 0.071) = $746,505.05
• Year 2: $125,000 / (1 + 0.071)^2 = $111,415.43
• Year 3: $200,000 / (1 + 0.071)^3 = $168,524.66
• Year 4: $360,000 / (1 + 0.071)^4 = $280,212.96
• Year 5: $620,000 / (1 + 0.071)^5 = $439,014.55
• Years 6-8: $540,000 / (1 + 0.071)^6 + $540,000 / (1 + 0.071)^7 + $540,000 / (1 + 0.071)^8 = $348,678.45

Now, we sum up the present values of the cash flows and subtract the initial investment of $200,000:

NPV = $746,505.05 + $111,415.43 + $168,524.66 + $280,212.96 + $439,014.55 + $348,678.45 - $200,000

= $1,294,351.10

Therefore, the net present value (NPV) of the project is $1,294,351.10.