Question

Consider two mutually exclusive projects with the following cash flows: Project A is a 6 year project with initial (time 0) cash outflow of 40,000 and time 1 through 6 cash inflows of 8000,14000,13000,12000,11000,and 10000 respectively. Project B is a 3 year project with initial (time 0) cash outflow of 20,000 and time 1 through 3 cash inflows of 7000,13000, and 12000 respectively. Assuming a 11.5% cost of capital compute the NPV for project A.

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=8000/1.115+14,000/1.115^2+13,000/1.115^3+12,000/1.115^4+11,000/1.115^5+10,000/1.115^6

=$47165.11

NPV=Present value of inflows-Present value of outflows

=47165.11-40,000

=$7165.11(Approx).