Question

Given the following information, calculate how many years this project should be run before it is retired. Assume the cost of
capital is 10% p.a.

Year 0 (10 000) Net Cash Flows ($) Retirement Values ($) Year 1 2200 6000 Year 2 3000 5000 Year 3 3500 4000 Year 4 2500 3000 Year 5 2000 2000

Answer 1

NPV of Cash flow year 1 =(2200+6000)/1.1-10000 =2545.45
NPV till cash flow year 2 =2200/1.1+(3000+5000)/1.1^2-10000 =-1388.43
NPV till cash flow year 3 =2200/1.1+3000/1.1^2+(3500+4000)/1.1^3-10000 =114.20

Number of years the project should be run before it is retired is 3 years.