Question

Example: A project costs $2,000 today and has an opportunity cost of capital of 10%. It has a 2 year life. It will produce cash revenues of $1,500 and $500 in Years 1 and 2 respectively. The asset can be depreciated at $1,000 per year.

Compare the NPV using cash flows, to the NPV using accounting income.s

Answer 1

Given,

Cost = $ 2000

Opportunity cost of capital = 10% or 0.10

Depreciation per year = $ 1000

Cash flow for year 1 = $ 1500

Cash flow for year 2 = $ 500

Solution :-

NPV using Cash flows + Cost = $2000, CF = $1500, CF = $500 NPU= CF CF - Cost TH) 11+22 1500 $500 - $ 2000 11+0.10) 7 (40.10) 11.10' 11.10)? $1500 & $500 - $2000 1.21 - $1363.64 +8413.22 - $ 2000 = - $223.14 NPV using accounting Income - Accounting Income for year 1 (AI) - CF - Depreciation. = $1500 - $1000 = $ 500

Accounting income for year 2 (AI) - CF2 - Depreciation - $500 - $ 1000 = - & 500 رحمام νρυ = , (148) AIZ 11+ $ 500 (a $500 (1+0.10)' +0.102) - $500 11.10)' ' L (1.10) $500 - $ 500] 1 1.22 - $454.55+ [-$413.22] - $454.55 - $413.22 llo - $41.33