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Hi Mr. Maffot,
I have tried to attempt this question many times. However I’m not getting the answer. Can you please explain this question and answer.
Thanks.
The following information relates to a two-year project.
Initial investment $1 million
Cash inflow Year 1 $750,000
Cash inflow Year 2 $500,000
Cost of capital Year 1 10%
Cost of capital Year 2 15%What is the net present value of the project (to the nearest $500)?
A ($12,000)
B ($55,000)
C $77,000
D $116,500Does your book not show the workings for the answer?
The PV of the cash inflow at time 1 is 750,000 x (1/1.1)
or, alternatively 750,000 x the 1 year discount factor at 10%The PV of the cash inflow at time 2 is 500,000 x (1/1.1) x (1/1.15)
or, alternatively, 500,000 x the 1 year discount factor at 10% x the 1 year discount factor at 15%Using the discount factors from the tables will give a slightly different answer because of the rounding in the tables, but to the nearest 500 it will not make a difference 🙂
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