A project has an initial outlay of $2,396. The project will generate annual cash flows of $593 over the 4-year life of the project and terminal cash flows of $285 in the last year of the project. If the required rate of return on the project is 11%, what is the net present value (NPV) of the project?
Calculation of NPV
Answer: NPV = -$368.55
NPV = Present Value of cash inflows – Initial Investment
Calculation of Present value of cash inflows for project
Year |
Cash Flow |
Present Value Factor @ 11% |
Present Value of cash flow |
(I) |
(II) |
(III) |
(II) * (III) |
1 |
$593 |
0.9009 |
$534.23 |
2 |
$593 |
0.8116 |
$481.28 |
3 |
$593 |
0.7312 |
$433.60 |
4 |
$593 |
0.6587 |
$390.61 |
4 |
$285 |
0.6587 |
$187.73 |
Present Value of the Cash flows inflows |
$2,027.45 |
Initial Investment = $2,396/- (provided in the question)
NPV = Present Value of cash inflows – Initial Investment
NPV = $2,027.45 - $2,396
= -368.55
Calculation of Discounting Factor (Present Value Factor)
Discount Factor = 1/ (1+R) N
R = Discount Rate (i.e. = 11%)
N = No of years
E.g. for year 2 Discount Factor = 1/ (1.11)2
= 1/ (1.11) (1.11)
= 0.8116
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