Question

Calculate the NPV for the following Investment A, assuming an annual discount rate of 10%.

C=10,000	C=8,000	C=6,000	I=7,500	I=7,500	...	I=7,500	L=10,000
0	1	2	3	4	...	10

C: Cost, I:Income, L: Salvage value

Answer 1

Net Present Value (NPV)

Year	Annual Cash Inflow ($)	Present Value Factor at 10%	Present Value of Annual Cash Inflow ($)
1	-8,000 [Cost]	0.90909	-7,272.73
2	-6,000 [Cost]	0.82645	-4,958.68
3	7,500 [Income]	0.75131	5,634.86
4	7,500 [Income]	0.68301	5,122.60
5	7,500 [Income]	0.62092	4,656.91
6	7,500 [Income]	0.56447	4,233.55
7	7,500 [Income]	0.51316	3,848.69
8	7,500 [Income]	0.46651	3,498.81
9	7,500 [Income]	0.42410	3,180.73
10	17,500 [Income + Salvage Value] [$10,000 + 7,500]	0.38554	6,747.01
TOTAL			$24,691.75

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $24,691.75 - $10,000

= $14,691.75

“Hence, The Net Present Value (NPV) of the INVESTMENT – A = $14,691.75”

NOTE

The Formula for calculating the Present Value Factor is is 1/(1 + r)ⁿ, Where “r” is the Discount Rate and “n” is the number of years.