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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 $116,500this is how l had calculated it which happens to be wrong
kindly help the best way you canyear cashflow discounting factor present value
0 (1000 000) 1 (1000 000)
1 750 000 0.909 (at 10% year 1) 681 750
2 500 000 0.870 (at 15% year 1) 435 000
500 000 0.909 (at 10% year 1) 454 500getting the total PV of 571250
The flow at time 2 needs discounting for 2 years.
We discount for 1 year at 15% and then for another year at 10%.
So multiply the flow by the 1 year factor at 15% and then multiply the result by the 1 year factor at 10%.
Have you watched my free lectures on this? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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