Question

6.A project costs $200,000 today and returns cash flows of $30,000 each year (end of year) forever. If the WACC is 10%, what is the NPV?

6a. What if the cash inflows only lasted for 15 years? What is the NPV then?

6b. What if the cash flows were constantly growing at 5% forever? What is the NPV then?

Please work out with formulas and explanations. No excel please.

Answer 1

6. NPV = present value of cash inflows - present value of cash outflows

30,000/10% - 200,000

=$100,000

6a NPV = 30,000*PVAF(10%, 15 years) -200,000

=30,000*7.606 -200,000

=$28,180

6b NPV = 30,000/(10%-5%) - 200,000

=$400,000