Question

A project initially costs $40,500 and will not produce any cash flows for the first 2 years. Starting in Year 3, it will produce cash flows of $34,500 a year for 2 years. In Year 6, the project will end and should produce a final cash inflow of $12,000. What is the net present value of this project if the required rate of return is 18.5 percent?

Answer 1

Net present value = $2063.1922

Step-by-step explanation:

given data

initially costs = $40,500

cash flows = $34,500

final cash inflow = $12,000

required rate of return = 18.5 percent

solution

The cash flows is

Year 0 = $40500

Year 1 = $0

Year 2 = $0

Year 3 = $34500

Year 4 = $34500

Year 5 = $0

Year 6 = $12000

so Net present value will be express as

Net present value = -Initial cash outflow + Present value of future cash flows ...............1

Present value of future cash flows = (cash flow in year n) ÷ (1 + required rate of return)^t ..........................2

put here value we get

Present value =
`(0)/((1+0.185)^1) + (0)/((1+0.185)^2) + (34500)/((1+0.185)^3) + (34500)/((1+0.185)^4) + (0)/((1+0.185)^5) + (12000)/((1+0.185)^6)`

Present value = $42563.1922

Net present value= -$40500 + $42563.1922

Net present value = $2063.1922