Question

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A project requires $ 1,000 investment today, and generates a single cash flow of $ 2,000 in year 3 . Assume the cost of capital is 10 % . What is the NPV of the project?

Answer 1

Given,Initial Investment = $1000Cash Flow at the end of year 3 = $2000Cost of Capital = 10%NPV formula is:NPV = [Cash flow / (1+rate)^(year-1)] - initial investmentTo calculate the NPV of the project, follow the steps below:Year 1 = -$1,000 (Initial Investment)Year 2 = -$1,000 (Initial Investment)Year 3 = $2,000 (Cash flow)Formula for NPV for year 3= ($2,000/(1+0.1)^(3-1)) - $1,000= ($2,000/1.21) - $1,000= $1,652.89 - $1,000= $652.89Therefore, the NPV of the project is $652.89.The answer is a long answer because it includes the formula for NPV and all the necessary calculations.