If a project has a 5-year life, requires an initial investment of $200,000, and
ID: 2449012 • Letter: I
Question
If a project has a 5-year life, requires an initial investment of $200,000, and is expected to yield annual cash flows of $60,000, what is the net present value of the project if the required rate of return is set at 10%? If required, round your answer to the nearest cent.
Present Value Tables
The Present Value of an Ordinary Annuity is the value of a stream of expected or promised future payments that have been discounted to a single equivalent value today. It is extremely useful for comparing two separate cash flows that differ in some way.
Present Value of an Annuity of $1 at Compound Interest
. Net Present Value Computation = ( $_____ x ______ ) – $________
What NPV does the previous calculation yield? $_______
Explanation / Answer
Calculation of Present Value of inflows Year Cash Flow Discount Factor (@10%) Discounted Cashflow 1 $ 60,000 0.91 $ 54,600 2 $ 60,000 0.83 $ 49,800 3 $ 60,000 0.75 $ 45,000 4 $ 60,000 0.68 $ 40,800 5 $ 60,000 0.62 $ 37,200 Total $ 3,00,000 3.79 $ 2,27,400 Calculation of Net present Value A Present Value of Inflows $ 2,27,400 B Present Value of outflows $ 2,00,000 C Net Present Value (A)-(B) $ 27,400 Net Present Value Computation = ($ 300,000 x (3.79/5))- $ 200,000 $ 2,27,400.00 where $300,000 Future cash inflows 3.79/5 = 0.76 Present Value of an Annuity of $1 at Compound Interest $200,000 Present value of cash outflows
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