An investment project with initial investment of 200,000 dollars at present time

Question

An investment project with initial investment of 200,000 dollars at present time has 35% probability of success and 65% probability of failure. In case of success, project will yield annual income of 55,000 dollars for six years (from first to sixth year) with the salvage value of 100,000 dollars at the end of sixth year. In case of failure, project yield zero income but salvage value of 180,000 dollars at the end of year 2. Considering minimum ROR 12%, calculate the expected NPV and explain if this investment is satisfactory. Explain your work in detail including all the required equations and calculations.

Explanation / Answer

NPV for 35%of sucess NPV=sum of PV

pv=cash flows *PV factor

Total value of the sucess project =NPV +salvage value=226127.4+100000=$326127.4

The NPV for falure project is $180000

year Cash flows pv factor @12% PV 1 1 55000 0.892857143 49107.14 2 55000 0.797193878 43845.66 3 55000 0.711780248 39147.91 4 55000 0.635518078 34953.49 5 55000 0.567426856 31208.48 6 55000 0.506631121 27864.71 NPV $226127.4

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