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bank 1 is considering adding a new branch bank. They know that it will cost $1.25...

bank 1 is considering adding a new branch bank. They know that it will cost $1.25 million to build the branch and they believe that it will generate $220,000 per year for the next 30 years. bank 1 requires a return of 10% on all new projects it undertakes. What is this project’s net present value?

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Answer #1

PV of Cash Inflows = Annual Cash Flow * [{1 - (1 + r)-n} / n]

= $220,000 * [{1 - (1 + 0.10)-30} / 0.10]

= $220,000 * [0.9427 / 0.10] = $220,000 * 9.4269 = $2,073,921.18

NPV = PV of Cash Inflows - PV of Cash Outflows

= $2,073,921.18 - $1,250,000 = $823,921.18

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