Question

A firm has undertaken a feasibility study to evaluate a project that has the following estimated cashflows:

• Increased sales to business of $160,000 for the next four years (starting in one year's time)
• Increased costs of $40,000 for the next two years (starting in one year's time)
• The initial capital expenditure required is $400,000.
• The feasibility study cost $8,000 to conduct.
• Amount borrowed to fund project is $280,000 with interest of 7.5% p.a. paid yearly.

If the firm is facing a discount rate of 10%, what is the NPV of this project?

		29,756.98
		37,756.98
		4,243.02
		35,756.98

Answer 1

First we shall calculate the cash inflows each year as below:

Year	Sales	Cost	Cash Inflows
1	160000	40000	120000
2	160000	40000	120000
3	160000		160000
4	160000		160000

NPV = Present value of cash inflows - Cash outflows

Calculate NPV as below:

Year	Cash flows	PV Factor	Present Value
0	-400000	1	-400000
1	120000	0.909091	109090.91
2	120000	0.826446	99173.55
3	160000	0.751315	120210.37
4	160000	0.683013	109282.15
NPV			37756.98

NPV is $37756.98. Second option is correct