Question

Roman Knoze is considering two investments. Each will cost $20,000 initially. Project 1 will return annual cash flows of $10,000 in each of three years. Project 2 will return $5,000 in year 1, $10,000 in year 2, and $15,000 in year 3. Roman requires a minimum rate of return of 10%. What is the net present value of Project 2

Answer 1

Answer:

NPV= $4,079.63

Explanation:

Giving the following information:

Initial cost= -$20,000

Rate of return= 10%

To calculate the net present value, we need to use the following formula:

NPV= -Io + ∑[Cf/(1+i)^n]

First, we need to discount the cash flows:

PV= Cfn / (1+i)^n

Cf1= 5,000/1.1= 4,545.45

Cf2= 10,000/1.1^2= 8,264.46

Cf3= 15,000/1.1^3= 11,269.72

Total PV= $24,079.63

Now, the NPV:

NPV= -20,000 + 24,079.63

NPV= $4,079.63