Question

The cash flows associated with an investment project are an immediate cost of $2300 and benefits of $1200 in one year, $800 in two years, and $2000 in three years. The cost of capital (WACC) is 10%. What is the project's NPV? Your Answer: Answer Hide hint for Question 6 NPV is the sum of the discounted cash flows.

Answer 1

Formula for Net Present Value (NPV) calculation

Net present value (NPV) of Project = Sum of [cash flows/ (1+wacc) ^t] - initial cash outflow

Where,

Initial Outflow of Cash for project = -$2300

Cash inflows = $1200, $800 & $2000 for year 1, 2 & 3

Weightage average cost of capital WACC=10%

And time period t = 1, 2, 3,

Therefore,

NPV = $1200/ (1+10%) ^1 +$800/ (1+10%) ^2 + $2000/ (1+10%) ^3 - $2300

= $1,090.91 + $661.16 + $1,502.63 -$2300

= $954.70

Therefore NPV is $954.70

Formula for Net Present Value (NPV) calculation

Net present value (NPV) of Project = - FCF0 + FCF1/ (wacc –g)

Where,

FCF0 = -$116 million

FCF1 = $9 million

Weightage average cost of capital WACC=9%

Perpetual growth rate g = 2%

Therefore,

NPV = -$116 million +$9 million/ (9% -2%)

= -$116 million +$128.57 million

= $12.57 million

Therefore NPV is $12.57 million