Question

NPV Analysis. Kim Corporation invested in a 4-year project. Kim's cost of capital is 8 percent. Additional information on the project follows: Year After-Tax Cash Inflow 1 $2,000 2 $2,200 3 $2,400 4 $2,600 Present Value of $1 at 8% 0.926 0.857 0.794 0.735 Assuming a NPV of $700, what was the initial investment?

Answer 1

Solution-

NPV= Total Present value of all future cash inflows- Initial investment

Here PV of $1 for each year is given

Therefore the PV of Cashflow of the particular year will be = Cashflow* PV of $1 for that year

Calculation given below

1 А Year 1 2 2 3 B с After tax cash inflow PV of$1 @8% 2200 0.926 2200 0.857 2400 0.794 2600 0.735 Total PV D PV 2037.2 1885.4 1905.6 4 3 4 5 1911.00 7739.2 6

Excel formula

A B D с PV of$1 @8% 1 Year After tax cash inflow PV 2 1 2200 2200 0.926 0.857 =B2*C2 =B3*C3 3 2 4 3 2400 0.794 =B4*C4 5 4 2600 0.735 =B5*C5 ESUM(D2:05) 6 Total PV

Now, NPV= Total Present value of all future cash inflows- Initial investment

700=7739.2-Initial investment

Initial investment= 7039.2

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