Question

A project will not produce any cash flows for two years. Starting in the third year, it will produce annual cash flows of $11,900 a year for two years. The project initially costs $43,600. In Year 6, the project will be closed and as a result should produce a final cash inflow of $50,500. What is the net present value of this project if the required rate of return is 8.7 percent?

Answer 1

Answer:

The NPV of the project at 8.7 percent will be  4,802.58‬

Explanation:

We will calcualte the present value of the cash inflow:

$\frac{Inflow}{(1 + rate)^{time} } = PV$  

year 3:

Inflow     11,900.00

time          3.00

rate          0.087

$\frac{11900}{(1 + 0.087)^{3} } = PV$

PV    9,265.28

Year 4:

Inflow      11,900.00

time           4.00

rate           0.087

$\frac{11900}{(1 + 0.087)^{4} } = PV$  

PV   8,523.71

Year 6:

Inflow      50,500.00

time   6.00

rate  0.087

$\frac{50500}{(1 + 0.087)^{6} } = PV$  

PV   30,613.58

Then, we will add them together and subtract the investment amount

NPV: 30,613.59 + 8,523.71 + 9,265.28 - 43,600 = 4,802.58‬