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You are considering a project that will pay you $710 in the first year, $2,000 in...

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Finance

You are considering a project that will pay you $710 in thefirst year, $2,000 in the second year, and $1,090 in the thirdyear. In the fourth year, the project will pay you a cash flow of3,000, which starting from the fifth year will grow forever at arate of 2%. If the interest rate for this project is 12%, and thetime-zero cost of starting this project is $10,000, what is the NetPresent Value (PV of benefits minus PV of costs) of the project?Round your answer to the first two decimal places.

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4.5 Ratings (618 Votes)

Step-1:Calculation of present value of cash inflows of first 4 years
Year Cash flow Discount factor Present value
a b c=1.12^-a d=b*c
1 $           710         0.893 $       633.93
2 $       2,000         0.797 $   1,594.39
3 $       1,090         0.712 $       775.84
4 $       3,000         0.636 $   1,906.55
Total $   4,910.71
Step-2:Calculation of present value of cash flows after year 4
Present value = CF4*(1+g)/(K-g)*DF4 Where,
= $ 19,446.85 CF4 Cash flow of year 4 $    3,000
g Growth rate 2%
K Interest rate 12%
DF4 Discount factor of Year 4         0.636
Step-3:Calculation of net present value of the project
Present value of cash inflows of first 4 years $   4,910.71
Present value of cash inflows after year 4 $ 19,446.85
Total present value of cash inflows $ 24,357.56
Less Cost of project at time zero $ 10,000.00
Net Present value of the project $ 14,357.56
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