Answer:
The NPV is $534,819.11
Explanation:
The computation of the Net present value is shown below
= Present value of all yearly cash inflows after applying discount factor - initial investment
The discount factor should be computed by
= 1 ÷ (1 + rate) ^ years
where,
rate is 9%
Year = 0,1,2,3,4 and so on
Discount Factor:
For Year 1 = 1 ÷ 1.09^1 = 0.9174
For Year 2 = 1 ÷ 1.09^2 = 0.8417
For Year 3 = 1 ÷ 1.09^3 = 0.7722
For Year 4 = 1 ÷ 1.09^4 = 0.7084
For Year 5 = 1 ÷ 1.09^5 = 0.6499
For Year 6 = 1 ÷ 1.09^6 = 0.5963
For Year 7 = 1 ÷ 1.09^7 = 0.5470
For Year 8 = 1 ÷ 1.09^8 = 0.5018
So, the calculation of a Present value of all yearly cash inflows are shown below
= Year 1 cash inflow × Present Factor of Year 1 + Year 1 cash inflow × Present Factor of Year 1 + Year 1 cash inflow × Present Factor of Year 1 + Year 1 cash inflow × Present Factor of Year 1 + Year 1 cash inflow × Present Factor of Year 1 + Year 1 cash inflow × Present Factor of Year 1 + Year 1 cash inflow × Present Factor of Year 1 + Year 1 cash inflow × Present Factor of Year 1
= $1,000,000 × 0.9174 + $1,000,000 × 0.8417 + $1,000,000 × 0.7722 + $1,000,000 × 0.7084 + $1,000,000 × 0.6499 + $1,000,000 × 0.5963+ $1,000,000 × 0.5470 + $1,000,000 × 0.5018
= $917,431.19 + $841,679.99 + $772,183.48
+ $708,425.21 + $649,931.39 + $596,267.33 + $547,034.24 +$501,866.28
= $5,534,819.11
So, the Net present value equals to
= $5,534,819.11 - $5,000,000
= $534,819.11
We take the first four digits of the discount factor.
