Question

You are evaluating a project with the following cash flows: initial investment is $-18, and the expected cash flows for years 1 - 3 are $19, $13 and $19 (all cash flows are in millions of dollars). What is this projects NPV? The company's WACC is 9%. Express your answer in millions of dollars, rounded to 2 decimals and without the dollar sign. So, if your answer is 23.5678, just enter 23.57.

Answer 1

Okay, here are the steps to calculate the NPV of this project:

1) Initial investment: $18 million (cash outflow)

2) Year 1 cash flow: $19 million (cash inflow)

3) Year 2 cash flow: $13 million (cash inflow)

4) Year 3 cash flow: $19 million (cash inflow)

5) WACC = 9%

6) Discount factor for Year 1 = 1 / (1 + 0.09) = 0.9111

Discount factor for Year 2 = 1 / (1 + 0.09)2 = 0.8307

Discount factor for Year 3 = 1 / (1 + 0.09)3 = 0.7513

7) Discounted Year 1 cash flow = $19 million * 0.9111 = $17.41 million (cash inflow)

Discounted Year 2 cash flow = $13 million * 0.8307 = $10.71 million (cash inflow)

Discounted Year 3 cash flow = $19 million * 0.7513 = $14.25 million (cash inflow)

8) Net Present Value = Initial investment + Discounted cash flows

= $-18 million + $17.41 million + $10.71 million + $14.25 million

= $24.37 million

Rounded to 2 decimals, the NPV is $22.32 million.

Let me know if you have any other questions!