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I have question frm BBP revision kit…
A project has an initial outflow of $12000 followed by sin equal annual cash flows, commencing in one year’s time. The payback period is exactly four years. The cost of capital is 12% per year.
What is the project’s net present value(to the nearest $)?Ans: $333
If the payback period is 4 years and the cash flows are equal, then the cash flows must be $3,000 per year.
So to get the NPV you multiply $3,000 by the 6 year annuity factory at 12%, and subtract the initial outflow of $12,000.
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I want to know whether or not incremental costs are added to the intial investment cost figure to be deducted from the total discounted cash inflows to arrive at the NVP
All incremental costs are relevant, but they are not added to the initial cost – they are cash outflows in whatever years they occur.
So meaning the incremental costs should be discounted to find their pv values and then totalled to be deducted from the discounted cash inflows to arrive at the NPV?
You could do this (and it would give the correct answer), but quicker is simply to subtract the outflows from the inflows in each year, and then discount the net cash flows.
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