. Computing net present value. Gators, Inc., is considering a project that requi

Question

. Computing net present value. Gators, Inc., is considering a project that requires an initial investment of $2,000,000 and that will generate the following cash inows for the next ve years:
Year Cash Inflow at End of Year
1............................................................................................................................................ $300,000 2............................................................................................................................................ 400,000 3............................................................................................................................................ 800,000 4............................................................................................................................................ 800,000 5............................................................................................................................................ 600,000
Calculate the net present value of this project if Gator’s cost of capital is a. 12 percent. b. 20 percent.

Explanation / Answer

1)Present value of cash inflow = (PVF@12%,1*CF1)+(PVF@12%,2*CF2).....(PVF@12%,5 *CF5)

                   = (.89286*300000)+(.79719*400000)+(.71178*800000)+(.63552*800000)+(.56743*600000)

                   = 267858+ 318876+ 569424+ 508416+ 340458

                    = 2005032

NPV = 2005032 - 2000000 = $ 5032

B)Present value = (PVF@20%,1*CF1)......(PVF@20%,5*CF5)

         = (.83333*300000)+(.69444*400000)+(.57870*800000)+(.48225*800000)+(.40188 *600000)

          = 249999+ 277776+ 462960+ 385800+ 241128

           = $ 1617663

NPV = 1617663-2000000= $ -382337

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