Question

A project requires a $30,000 initial investment and is expected to generate end-of-period annual cash inflows as follows: Year 1 Year 2 Year 3 Total $ 12,000 $ 8,000 $ 10,000 $ 30,000 Assuming a discount rate of 10%, what is the net present value (rounded to the nearest whole dollar) of this investment

Answer 1

The Net Present Value (NPV) of an investment is calculated by subtracting the initial investment from the present value of its cash inflows. In this case, we need to calculate the present value of the cash inflows for each year and then subtract the initial investment.

The formula to calculate the present value (PV) is: PV = Cash inflow / (1 + discount rate) ^ year

Let's calculate the present value for each year:

- Year 1: PV1 = $12,000 / (1 + 0.10)^1 = $10,909

- Year 2: PV2 = $8,000 / (1 + 0.10)^2 = $6,612

- Year 3: PV3 = $10,000 / (1 + 0.10)^3 = $7,513

The total present value of the cash inflows is the sum of these, or $25,034. The NPV is then calculated by subtracting the initial investment from the total present value of the cash inflows, which results in NPV = $25,034 - $30,000 = -$4,966.

So, the NPV of the project, rounded to the nearest whole dollar, is -$4,966. This negative NPV suggests that the project would not be a profitable investment given a discount rate of 10%.