Question

Given the following data for Project M calculate the NPV of the project. Cash flow in nominal terms: Real discount rate= 5% Nominal discount rate = 10% Co -100 C₁ 75 C₂ 60​

Answer 1

The Net Present Value (NPV) of Project M is calculated using the nominal discount rate and the provided cash flows. After discounting each cash flow to its present value, the total NPV of Project M is 17.77, indicating a positive return for the project.

Step-by-step explanation:

To calculate the Net Present Value (NPV) of Project M, we must discount the future cash flows back to their present value using the nominal discount rate provided, which is 10%. The cash flows are: initial investment (Co) at time 0 of -100, first year cash flow (C1) of 75, and second year cash flow (C2) of 60.

Present Value of C1: PV = C1 / (1 + r)n

= 75 / (1 + 0.10)1

= 75 / 1.10

= 68.18.

Present Value of C2: PV = C2 / (1 + r)n

= 60 / (1 + 0.10)2

= 60 / 1.21

= 49.59.

The total NPV of Project M is the sum of all present values minus the initial investment:

NPV = Co + PV of C1 + PV of C2

= -100 + 68.18 + 49.59

= 17.77.

Therefore, the NPV of Project M is 17.77, which implies the project is expected to add value to the firm as it’s positive.