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- This topic has 3 replies, 3 voices, and was last updated 5 months, 1 week ago by clyuba.

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- January 2, 2020 at 3:45 pm

izazwaliParticipantA business is considering a project reguinng an investment of $200,000 now and with estimated cash inflows of $23,000 per annum in perpetudy The first cash inflow would be received in one year’s time. The cost of capital is 10% per annum.

What is the net present value of the investment?January 3, 2020 at 12:04 pm

Ken GarrettKeymasterThe cumulative discount for a perpetuity (a constant flow, starting at Time 1 and lasting for ever) is 1/r where r is the discount rate expressed as a decimal.

So, if $36,000 were going to be received each year, starting Time 1, and the discount rate was 12%, the present value of the perpetuity is:

$36,000 x 1/0.12 = $300,000.

If you had paid $250,000 to acquire that perpetuity, your NPV would be:

-$250,000 + $300,000 = $50,000.

February 6, 2020 at 8:23 am

clyubaParticipantWhy is it that the rate has changed from 10% to 12%hence dividing by 0.12?

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