Investment Appraisal

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August 18, 2020 at 10:53 am #581020
darshini01
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Related question :

HMF Co is evaluating a project which requires investment of $5000 now and $2000 at the end of Year 1. The cash flow will be $7000 at the end of Year 2 and $6000 at the end of Year 3. Calculate the NPV to the nearest $. The cost of capital is 16%.

ACTUAL QUESTION :
I have the answer sheet of the question but unable to understand why the year 1 cash flow figure is treated as a negativ figure (see below)

Answer according to answer sheet:

Yr cashflow Disc. fact. Present value
$ $
0 (5000) 1.000 (5000)
1 (2000) 0.862 (1724)
2 7000 0.743 5201
3 6000 0.641 3846

Resulting NPV to $ 2323

I’ll be grateful if my query is solved. Thank you.
August 18, 2020 at 4:34 pm #581072
John Moffat
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The question says that the project requires and investment of $5,000 now (so time 0) and $2,000 at the end of year 1 (so time 1).

Since these are both investments of money, they are outflows of cash and so are shown as negative.
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