Consider a project that will generate revenues at the ned of the first and second years....
Consider a project that will generate revenues at the ned of the first and second years. Initial costs and expenses are $3000. In addition, the projects cost of capital is 7%.
You are given the following information.
| Scenario | 1 | 2 | 3 | 4 |
| First Year Revenues | $1100 | $1500 | $1800 | $1200 |
| Second Year Revenues | $2900 | $2500 | $2200 | $2800 |
Determine the projects net present value of the worst scenario.
Homework Answers
| Calculation of NPV in Scenario 1 | |||
| Amount in $ | |||
| Year | Cashflow | Discounting factor @ 7% | PV of cashflow |
| 0 | -3000 | 1 | -3000 |
| 1 | 1100 | 0.934579439 | 1028.037383 |
| 2 | 2900 | 0.873438728 | 2532.972312 |
| NPV | 561.0096952 | ||
| Calculation of NPV in Scenario 2 | |||
| Amount in $ | |||
| Year | Cashflow | Discounting factor @ 7% | PV of cashflow |
| 0 | -3000 | 1 | -3000 |
| 1 | 1500 | 0.934579439 | 1401.869159 |
| 2 | 2500 | 0.873438728 | 2183.596821 |
| NPV | 585.4659796 | ||
| Calculation of NPV in Scenario 3 | |||
| Amount in $ | |||
| Year | Cashflow | Discounting factor @ 7% | PV of cashflow |
| 0 | -3000 | 1 | -3000 |
| 1 | 1800 | 0.934579439 | 1682.242991 |
| 2 | 2200 | 0.873438728 | 1921.565202 |
| NPV | 603.8081929 | ||
| Calculation of NPV in Scenario 4 | |||
| Amount in $ | |||
| Year | Cashflow | Discounting factor @ 7% | PV of cashflow |
| 0 | -3000 | 1 | -3000 |
| 1 | 1200 | 0.934579439 | 1121.495327 |
| 2 | 2800 | 0.873438728 | 2445.628439 |
| NPV | 567.1237663 | ||
| Comparatively the NPV in Scenario 1 is less so it is the NPV of the worst scenario. |
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