Question

Online Store is considering a project with an initial cost of $500,000. The project will not produce any cash flows for the first two years. Starting in Year 3, the project will produce cash inflows of $95,000, Year 4 of 150,000, Year 5 of 150,000, Year 6 of $200,000, Year 7 of $225,000 and year 8 of $175,000. This project is risky, so the firm has assigned it a discount rate of 12.5 percent. What is the project's net present value

Answer 1

$9,118.48

Step-by-step explanation:

The calculation of the project's net present value is shown below:-

Year Cash flows Discount rate 12.5% PV of cash inflows

(in $) (in $)

0 -500,000 1 -500,000 (A)

1 0 0.8888888889 0.00

2 0 0.7901234568 0.00

3 95,000 0.7023319616 66,721.54

4 150,000 0.624295077 93,644.26

5 150,000 0.5549289573 83,239.34

6 200,000 0.4932701843 98,654.04

7 225,000 0.438462386 98,654.04

8 175,000 0.3897443431 68,205.26

Present value 509,118.48 (B)

Net present value 9,118.48 (B - A)

Therefore to reach the net present value we simply deduct the present value from the initial cost.