Question

a firm is considering an investment project that costs $250,000 today and $250,000 in one year, but would produce benefits of $50,000 a year, starting in one year, forever. what is the npv of this investment project if the firm applies an annual discount rate of 7.6% to all future cash flows?

Answer 1

The Net Present Value (NPV) of the investment project can be calculated by finding the present value of the cash inflows and outflows. In this case, the initial investment cost of $250,000 today and $250,000 in one year can be treated as a cash outflow. The future cash flows of $50,000 per year, starting in one year, can be treated as cash inflows. The NPV is calculated by discounting these cash flows at the annual discount rate of 7.6%.

Step-by-step explanation:

The Net Present Value (NPV) of the investment project can be calculated by finding the present value of the cash inflows and outflows. In this case, the initial investment cost of $250,000 today and $250,000 in one year can be treated as a cash outflow.

The future cash flows of $50,000 per year, starting in one year, can be treated as cash inflows. The NPV is calculated by discounting these cash flows at the annual discount rate of 7.6%.

To calculate the present value of the cash flows, you can use the formula PV = CF / (1+r)^n, where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of periods.

For the investment project, the present value of the cash inflows can be calculated as follows:

PV = $50,000 / (1+0.076) + $50,000 / (1+0.076)^2 + ...

Continue this pattern indefinitely, and sum up all the present values to get the NPV.