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Project NPV
4 Answers
Shannon Industries is considering a project which has the following cash flows:
Year Cash Flow
0 ?
1 $2,000
2 3,000
3 3,000
4 1,500
The project has a payback of 2.5 years. The firm's cost of capital is 12 percent. What is the project's net present value NPV?
A) $ 577.68
B) $ 765.91
C) $1,049.80
D) $2,761.32
Year Cash Flow
0 ?
1 $2,000
2 3,000
3 3,000
4 1,500
The project has a payback of 2.5 years. The firm's cost of capital is 12 percent. What is the project's net present value NPV?
A) $ 577.68
B) $ 765.91
C) $1,049.80
D) $2,761.32
Answers
1 to 4 of 4
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NPV is net present value, which is the value of the income discounted at 12% per year, less the original outgoing sum. In this case it must be calculated by working out the payback amount.
I am not going to give you the answer, you can get out your calculator.
To work this out:
Period of investment is 4 years, however ,it takes 2.5 years to recoup the original investment ( payback does not take into account the time value of money, that is, do not discount this 2.5 years -) therefore add up 2.5 years of cash flow to get the original investment.
Then add up:
Year 4 present value is 1500/(1/1.12^4)
Year 3 present value is 3000/(1/1.12^3)
Year 2 present value is 3000/(1/1.12^2)
Year 1 present value is 2000/(1/1.12)
year 0 is zero value
Take the pay back value away from the total of the present values above and you have the NPV.
Hope that helps you.
I am not going to give you the answer, you can get out your calculator.
To work this out:
Period of investment is 4 years, however ,it takes 2.5 years to recoup the original investment ( payback does not take into account the time value of money, that is, do not discount this 2.5 years -) therefore add up 2.5 years of cash flow to get the original investment.
Then add up:
Year 4 present value is 1500/(1/1.12^4)
Year 3 present value is 3000/(1/1.12^3)
Year 2 present value is 3000/(1/1.12^2)
Year 1 present value is 2000/(1/1.12)
year 0 is zero value
Take the pay back value away from the total of the present values above and you have the NPV.
Hope that helps you.
1 to 4 of 4
