Question

Consider the following capital budgeting problem, you invest 100 and expect to receive $50 in each of the next three years. The discount rate is 10%. What is the initial cost of the project, how much value is created and what would you be willing to sell the project for?

Answer 1

What is the initial cost of the project?

the initial cost or initial outlay = $100

how much value is created?

the NPV of the project = -$100 + $50/1.1 + $50/1.1² + $50/1.1³ = $24.34

the NPV basically gives us how much value or wealth is created by the project

and what would you be willing to sell the project for?

selling price = $124.34 (= initial outlay + NPV)