A project costs $91,000 today and is expected to generate cash flows of $11,000 per year...
A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital (discount rate) of 8 percent. Should this project be accepted, and why.
Homework Answers
Let the cash flow in Year n be CFn
Given, CF0 = -91000
CF1 - CF20 = 11000
Discount Rate = r = 8%
Net Present Value = -CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 + .... + CF20/(1+r)20
= -91000 + 11000/(1+0.08) + 11000/(1+0.08)2 + 11000/(1+0.08)3 + .... + 11000/(1+0.08)20
= -91000 + 11000[1- (1+0.08)-20]/0.08
= $17000
Since the NPV is greater than 0, the project will add value to the stakeholders and hence should be accepted
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