A firm is considering an investment project that costs $250,000 today and $250,000 in one year,...

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A firm is considering an investment project that costs $250,000 today and $250,000 in one year,...

A firm is considering an investment project that costs $250,000 today and $250,000 in one year, but would produce benefits of $50,000 a year, starting in one year, forever. What is the NPV of this investment project if the firm applies an annual discount rate of 7.1% to all future cash flows?

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Answer 1

Answer #1

NPV = present value of cash inflow- the present value of cash outflow.

Discounted at the cost of capital/required rate of return (7.1%)

NPV = $174,113.31

As NPV is positive the project can be accepted.

Present valuve of perpetual cash flow at year 1 - Cash flow annual discount rate 50,000 7o1% = 704,295.35 NPV You, 28 535 (1.

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Answer 2

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