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could you please explain how to attempt this question. I tried the method you explained in the lecture but I just do not seem to be getting the right answer. the answer is $19174.
A particular project requires an initial cash outflow of $60,000. 2 years from now, there will be a cash inflow of $20,000, with an inflow of the same amount each year after that for 5 years.
What is the NPV of the project if the discount rate is 10% (to the nearest whole number)?The flows are from time 2 to time 6.
So take the annuity factor for 6 years and subtract the factor for 1 year, so as to be left with the factor for years 2 to 6.
Alternatively you can take the annuity factor for 5 years (because there are 5 years of flows) and multiply by the 1 year factor to discount an extra year (because the annuity starts 1 year later – at time 2 instead of at time 1).
The two answers will be slightly different, because of rounding in the tables. However in the exam they never ask to the nearest $ (more like to the nearest $100) so that rounding is not a problem 🙂
I tried both the methods you have recommended but still do not get the NPV of $19174.
Could you please provide me with the workings.Sorry, have read the question again, the cash flows are from years 2 to 7. (There are 6 years of flows – one in 2 years time and then another 5 years).
The first method gives a discount factor of 4.868 – 0.909 = 3.959
Therefore the PV of the inflows is 20,000 x 3.959 = 79,180.
Therefore the NPV is 19,180.The second method is 20,000 x 4.355 x 0.909 = 79,174
Therefore the NPV is 19,174As I wrote before, the difference is just due to rounding in the tables and will not be relevant in the exam.
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