Question

The Allied Corporation analyzes a project that requires an immediate investment of $440. Allied estimates that at the end of the first year the project will generate a cash flow of $660, but that at the end of the second year, when the project ends, it will generate a negative cash flow of $85. The project's required rate of return is estimated to be 7.50%. Calculate the NPV of Allied's project.

Answer 1

Answer:

NPV = $100.4002 rounded off to $100.40

Explanation:

The NPV or net present value is the present value of a project or business's cash flows which are calculated by deducting the cash outflows from the cash inflows. NPV is a tool or criteria used for investment and project appraisal. The NPV can be calculated as follows,

NPV = CF1 / (1+r)  +  CF2 / (1+r)^2  +  ....  +  CFn / (1+r)^n   -   Initial Outlay

Where,

• CF1, CF2, ... represents the cash flows in Year 1, Year 2 and so on.
• r represents the discount rate

NPV = 660 / (1+0.075)  +  [ -85 / (1+0.075)^2]  -  440

NPV = $100.4002 rounded off to $100.40