When the risks of the individual components of a project’s cash flows are different, an acceptable procedure to evaluate these c
1 answer:
You might be interested in
A) The company should not invest in the provided project due to the negative NPV of the project.
B) The NPV of the project comes out to be (286).
<h3>What is NPV?</h3>NPV is an abbreviated form of Net present value and computed by deducting the cash outflows from cash inflows at the present value.
Given values:
Cash flow of year 1: $10,000
Cash flow of year 2: $10,000
Cash flow of year 3: $2,000
Cash outflow (cost of investment) =$20,000
Step-1 Computation of PV of cash inflows of every year:
PV of year 1 = Cash inflow of year 1 / (1+ interest rate)^ 1
= $10,000 / (1+0.07) ^ 1
= $10,000 X 0.934579
= $9,346
PV of year 2 = Cash inflow of year 1 / (1+ interest rate)^ 2
= $10,000 / (1+0.07) ^ 2
= $10,000 X 0.873438
= $8,735
PV of year 3= Cash inflow of year 1 / (1+ interest rate)^ 3
= $2,000 / (1+0.07) ^ 2
= $2,000 X 0.816297
=$1,633
Step-2 Computation of total amount of PV of cash inflows:
Step-3 Computation of NPV:
Therefore, the NPV comes out to be a negative amount of 286, and hence, the company should not accept the project.
Learn more about the net present value in the related link:
#SPJ1