Final answer:
The Net Present Value (NPV) of the project is calculated by discounting the future cash flows and salvage value to present value using the discount rate of 11% and then subtracting the initial investment, which results in an NPV of $272.23.
Step-by-step explanation:
The subject question is asking to calculate the Net Present Value (NPV) of a company's 2-year project using the given cash flows and discount rate. NPV is a method of evaluating the profitability of an investment. In this case, the project has the following cash flows: an initial investment of $1100, year 1 cash inflow of $520, year 2 cash inflow of $900, and a salvage value in year 2 of $210. The annual depreciation is calculated as the initial investment minus the salvage value, spread over the life of the project. To find the NPV, we must discount the future cash inflows and the salvage value back to their present value using the company's discount rate of 11%.
To calculate the present value of each cash flow, use the formula PV = CF / (1 + r)^n, where PV is the present value, CF is the cash flow in a given year, r is the discount rate (0.11), and n is the number of years from the present date to the date of the cash flow. After finding the present values, sum them up and subtract the initial investment to determine the NPV.
Here are the calculations:
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- Year 1 PV = $520 / (1 + 0.11)^1 = $468.47
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- Year 2 PV (Cash Inflow) = $900 / (1 + 0.11)^2 = $732.90
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- Year 2 PV (Salvage Value) = $210 / (1 + 0.11)^2 = $170.86
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- Total PV of Future Cash Flows = $468.47 + $732.90 + $170.86 = $1372.23
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- NPV = Total PV of Future Cash Flows - Initial Investment = $1372.23 - $1100 = $272.23
The NPV of the project is $272.23.