Question

If a project cost $100,000 and you get a cash flow of 30,000 in year 1, $40,000 in year 2, and $50,000 in year three. If you are using the NPV calculation in Excel, do you use all the numbers or not? Please explain your answer.

Answer 1

NPV compares the value of a dollar today of a project to the value of that same dollar in the future. NPV is used in capital budgeting method to assess the profitability of a project.

Net present value (NPV) of Project = [Expected cash inflow/ (1+ Discount rate) ^n] – Initial cash out flow

Where,

The cost of capital or discount rate r =? (Not given in question)

And time period t = 1, 2 and 3

Initial cash outflow or cost of the project = $100,000

Net cash inflows for project for year 1 = 30,000

Net cash inflows for project for year 2 = 40,000

Net cash inflows for project for year 3 = 50,000

If you are using calculation in excel (or otherwise); you need to use all the numbers and you need additional information; that is cost of capital or discount rate (r).

Where,

NPV = $30,000/(1+r)^1 + $40,000/(1+r)^2 + $50,000/(1+r)^3 - $100,000