Question

A project has an initial outlay of $2,396. The project will generate annual cash flows of $593 over the 4-year life of the project and terminal cash flows of $285 in the last year of the project. If the required rate of return on the project is 11%, what is the net present value (NPV) of the project?

Answer 1

Calculation of NPV

Answer: NPV = -$368.55

NPV = Present Value of cash inflows – Initial Investment

Calculation of Present value of cash inflows for project

Year	Cash Flow	Present Value Factor @ 11%	Present Value of cash flow
(I)	(II)	(III)	(II) * (III)
1	$593	0.9009	$534.23
2	$593	0.8116	$481.28
3	$593	0.7312	$433.60
4	$593	0.6587	$390.61
4	$285	0.6587	$187.73
Present Value of the Cash flows inflows	$2,027.45

Initial Investment = $2,396/- (provided in the question)

NPV = Present Value of cash inflows – Initial Investment

NPV = $2,027.45 - $2,396

            = -368.55

Calculation of Discounting Factor (Present Value Factor)

Discount Factor = 1/ (1+R) N

R = Discount Rate (i.e. = 11%)

N = No of years

E.g. for year 2 Discount Factor = 1/ (1.11)2

                                                                = 1/ (1.11) (1.11)

                                                = 0.8116