Question

What is the net present value of a project with the following

cash flows if the discount rate is 11 percent?
Year 0: $1,250,000 (cash flow )
Year 1: $425,000
Year 2: $555,000
Year 3: $600,000

Answer 1

The net present value (NPV) is a financial metric used to determine the profitability of an investment. To calculate the NPV, we need to discount the cash flows of the project to their present value using the discount rate.

Step-by-step explanation:

The net present value (NPV) is a financial metric used to determine the profitability of an investment. To calculate the NPV, we need to discount the cash flows of the project to their present value using the discount rate. The formula to calculate the NPV is:

NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3

Using the given cash flows and a discount rate of 11 percent, we can calculate the NPV as follows:

NPV = $1,250,000 + $425,000/(1+0.11) + $555,000/(1+0.11)2 + $600,000/(1+0.11)3

Solving this equation will give us the net present value of the project.

Answer 2

The net present value (NPV) of the project with the given cash flows and a discount rate of 11 percent is calculated by discounting each cash flow to its present value and summing them up, then subtracting the initial investment. The NPV for this project is $37,706.

Step-by-step explanation:

To calculate the net present value (NPV) of a project, we discount each of the project's cash flows back to its present value (PV) using the given discount rate and then sum these values. For this project, we have an initial outlay in Year 0 and cash inflows in Years 1 to 3. The discount rate provided is 11 percent.

Here are the steps to calculate the NPV:

1. 
   
3. Calculate the PV of the cash flow for Year 1: $425,000 / (1 + 0.11)¹ = $382,883
4. 
   
6. Calculate the PV of the cash flow for Year 2: $555,000 / (1 + 0.11)² = $451,327
7. 
   
9. Calculate the PV of the cash flow for Year 3: $600,000 / (1 + 0.11)³ = $453,496
10. 
    
12. Add the PVs of Year 1, Year 2, and Year 3: $382,883 + $451,327 + $453,496 = $1,287,706
13. 
    
15. Subtract the initial investment of $1,250,000 to find the NPV: $1,287,706 - $1,250,000 = $37,706

Therefore, the NPV of the project at an 11 percent discount rate is $37,706.