Question

A project will not produce any cash flows for two years. Starting in the third year, it will produce annual cash flows of $11,900 a year for two years. The project initially costs $43,600. In Year 6, the project will be closed and as a result should produce a final cash inflow of $50,500. What is the net present value of this project if the required rate of return is 8.7 percent?

Answer 1

The NPV of the project at 8.7 percent will be 4,802.58‬

Step-by-step explanation:

We will calcualte the present value of the cash inflow:

`(Inflow)/((1 + rate)^(time) ) = PV`

year 3:

Inflow 11,900.00

time 3.00

rate 0.087

`(11900)/((1 + 0.087)^(3) ) = PV`

PV 9,265.28

Year 4:

Inflow 11,900.00

time 4.00

rate 0.087

`(11900)/((1 + 0.087)^(4) ) = PV`

PV 8,523.71

Year 6:

Inflow 50,500.00

time 6.00

rate 0.087

`(50500)/((1 + 0.087)^(6) ) = PV`

PV 30,613.58

Then, we will add them together and subtract the investment amount

NPV: 30,613.59 + 8,523.71 + 9,265.28 - 43,600 = 4,802.58‬