You are considering a project that offers up the following possible payout with an opportunity cost...
You are considering a project that offers up the following possible payout with an opportunity cost of 20%.
Time 0 1 2
Base Case -$60,000 10,000 10,000
At the end of year two you know there is a 10% possiblity you will buy out your competitor which has the potential to create opportunities that are worth $974,212 at that time.
How much potential value is created or lost by taking on this project (i.e. what is the NPV)?
Homework Answers
| Opportunity cost | 20% | ||
| 1.2 | |||
| a | b | a*b | |
| Year | Cashflow | PV factor 20% [1/(1+r)]^n | PV |
| 0 | (60,000.00) | 1.000 | (60,000.00) |
| 1 | 10,000.00 | 0.833 | 8,333.33 |
| 2 | 10,000.00 | 0.694 | 6,944.44 |
| Current NPV of project | (44,722.22) | ||
| So potential value lost by the firm is $ -44722.22 | |||
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