Question

The development cost of a project X is $150,000. The operating costs for year 1, 2 and 3 respectively are $5000, $6000, and $ 7000. The benefits for year 0, 1, 2, 3 respectively are 0, $80,000, $90,000, and $70,000. The discount rate is 4%. The NPV is_

Answer 1

Answer:

NPV= $31,808.91

Explanation:

Giving the following information:

Io= -$150,000.

The operating costs:

Year 1= $5,000

Year 2= $6,000

Year 3= $7,000

The benefits:

Year 1= $80,000

Year 2= $90,000

Year 3= $70,000

To calculate the Net Present Value (NPV) we need to use the following formula:

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

Io= -150,000

Cf1= 80,000 - 5,000= 75,000/1.04= $72,115.39

Cf2= 90,000 - 6,000= 84,000/1.04^2=$77,662.72

Cf3= 70,000 - 7,000= 63,000/1.04^3= $56,006.77

NPV= $31,808.91