Question

A company is evaluating an expansion. This capital investment will require a cash outflow today of $6,500,000. The firm estimates that the investment will pay out a cash flow of $900,000 per year for the next 12 years, and then nothing after. The risk adjusted discount rate required on this project is 8%, calculate the net present value of this investment.

Answer 1

Net present value of this project is $282470.22

Step-by-step explanation:

Present value of inflows = Cash Inflow * Present value of discounting factor(rate%,time period)

=900,000/1.08+900,000/1.08^2+900,000/1.08^3+900,000/1.08^4+900,000/1.08^5+900,000/1.08^6+900,000/1.08^7+900,000/1.08^8+900,000/1.08^9+900,000/1.08^10+900,000/1.08^11+900,000/1.08^12

=6782470.22

NPV=Present value of inflows-Present value of outflows

=6782470.22-6,500,000

=$282470.22