Question

Naomi has always wanted to open a cyber coffee shop and has made her cash flow projections. She estimates that it will cost her $225,000 to develop the project, and the cash flows for the next six years will be $45,000, $69,000, $125,000, $185,000, $189,000, and $200,000 respectively. If her cost of capital is 9.5%, what is the net present value and internal rate of return of her project

Answer 1

NPV= 333,629.97

Step-by-step explanation:

Giving the following information:

Initial investment (Io)= $225,000

Cash flow:

Cf1= $45,000

Cf2= $69,000

Cf3= $125,000

Cf4= $185,000

Cf5= $189,000

Cf6= $200,000

Cost of capital= 9.5%

To calculate the net present value (NPV), we need to use the following formula:

NPV= -Io + ∑[Cf/(1+i)^n]

Cf1= 45,000/1.095= 41,095.89

Cf2= 69,000/1.095^2= 57,564.76

Cf3= 125,000/1.095^3= 95,206.73

Cf4= 185,000/1.095^4= 128,681.24

Cf5= 189,000/1.095^5= 120,058.03

Cf6= 200,000/1.095^6= 116,023.32

Total PV= $558,629.97

NPV= -225,000 + 558,629.07

NPV= 333,629.97