Question

Online Store is considering a project with an initial cost of $500,000. The project will not produce any cash flows for the first two years. Starting in Year 3, the project will produce cash inflows of $95,000, Year 4 of 150,000, Year 5 of 150,000, Year 6 of $200,000, Year 7 of $225,000 and year 8 of $175,000. This project is risky, so the firm has assigned it a discount rate of 12.5 percent. What is the project's net present value

Answer 1

Answer:

$9,118.48

Explanation:

The calculation of the project's net present value is shown below:-

Year Cash flows      Discount rate 12.5%        PV of cash inflows

          (in $)                                                            (in $)

0        -500,000              1                                     -500,000  (A)

1               0                0.8888888889                     0.00

2              0               0.7901234568                        0.00

3         95,000           0.7023319616                     66,721.54

4        150,000           0.624295077                      93,644.26

5        150,000          0.5549289573                    83,239.34

6       200,000            0.4932701843                   98,654.04

7       225,000           0.438462386                    98,654.04

8      175,000             0.3897443431                   68,205.26

Present value                                                        509,118.48  (B)

Net present value                                                 9,118.48 (B - A)

Therefore to reach the net present value we simply deduct the present value from the initial cost.