Question

You are analyzing a project with 5-year life. The project requires a capital investment of $10000 now, and it will generate uniform annual revenue of $6000 at the end of each year. Further, the project will have a salvage value of $2500 at the end of the fifth year and it will require $3000 each year for the operation. What is the net value of the project using year 1 as the basis, considering a 10% annual interest rate._________(round your answer to the nearest integer, e.g. enter 12345 if your answer is 12,345.2; enter 12346 if your answer is 12,345.7)

Answer 1

Answer:

NPV= $13160

Explanation:

To calculate the present value you need to use the Net Present Value. The NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

The formula is:

                      n

NPV= -Io + ∑[Rt/(1+i)^t

                     t-1

where:

R t​     =Net cash inflow-outflows during a single period t

i=Discount rate of return that could be earned in alternative investments

t=Number of timer periods

In this exercise:

0= -13000

1= 6000

2= 6000

3=6000

4=6000

5=6000 + 3000 + 2500= 11500

NPV= -13000 + (6000/1.10^1) + (6000/1.10^2) + ... + (115000/1.10^5)

NPV= $13160