Question

A four-year financial project has net cash flows of $20,000 $25,000;$30,000; and $50,000 in the next four years. It will cost $75,000 to implement the project. If the required rate of return is 0.2, conduct a discounted cash flow calculation to determine the NPV.

Answer 1

To calculate the NPV of the project, discount the future cash flows to their present values using the required rate of return. Sum up the present values and subtract the initial cost of the project.

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 values using the required rate of return. In this case, the required rate of return is 0.2, which represents a 20% return per year. We can calculate the present value of each cash flow by dividing it by (1 + r)^n, where r is the required rate of return and n is the number of years. Then, we sum up the present values of all the cash flows and subtract the initial cost of the project to get the NPV.

Here's how the calculation looks:

• The present value of the first cash flow is $20,000 / (1 + 0.2)^1 = $16,666.67
• The present value of the second cash flow is $25,000 / (1 + 0.2)^2 = $17,355.37
• The present value of the third cash flow is $30,000 / (1 + 0.2)^3 = $17,994.75
• The present value of the fourth cash flow is $50,000 / (1 + 0.2)^4 = $26,446.28
• The sum of all the present values is $16,666.67 + $17,355.37 + $17,994.75 + $26,446.28 = $78,463.07
• The NPV is $78,463.07 - $75,000 = $3,463.07