Question

Cortez Art Gallery is adding to its existing buildings at a cost of $2.8 million. The gallery expects to bring additional cash flows of $850,000, $950,000 and $1,250,000 over the next three years. Given a required rate of return of 7.2 percent. What is the NVP of this project?

Answer 1

To calculate the NPV of the project, you need to discount the expected cash flows using the required rate of return. The NPV formula involves dividing each cash flow by the corresponding discount factor and subtracting the initial investment. Calculating this equation will give you the NPV of the project.

Step-by-step explanation:

The Net Present Value (NPV) is a financial metric used to determine the profitability of an investment project. To calculate the NPV, we need to discount the expected cash flows using the required rate of return. In this case, the cash flows over the next three years are $850,000, $950,000, and $1,250,000, and the required rate of return is 7.2%. We can calculate the NPV using the formula:

NPV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + CF3 / (1 + r)^3 - Initial Investment

Substituting the values, the NPV of this project is:

NPV = 850,000 / (1 + 0.072)^1 + 950,000 / (1 + 0.072)2 + 1,250,000 / (1 + 0.072)3 - 2,800,000

Calculating this equation will give you the NPV of the project.