net present value

Dear Mr. Moffat, Hope your well. I need your help with the following question. The following information relates to a 2 year project. Initial investment $ 1m Cash inflow: yr 1: $ 750000, yr 2: $ 500000 Cost of capital: yr 1: 10%, yr 2: 15% What is the NPV of the project (to the nearest $500)? A. ($ 12000) B. ($ 55000) C. $ 77000 D. $ 116500. Given that the correct answer is C. However, when I did this math, i came up with a result of $ 59750. And when i checked the answer, it stated that for yr 1, 750000/1.10 & yr 2 500000 / (1.10 x 1.15). I'm confused with the denominators of both years. Kindly can you give me an alternative way to calculate this type of math & also explain to me why they used the cost of capital Discount factors in this way. Humble Regards Sir.

For every year that we discount we multiply by 1/(1+r), so if we were discounting at 10% per year we would multiply by 1/1.1 for one year, 1/1.1 x 1/1 (or (1/1.1)^2) for 2 years, and so on. Here, one year is at 10% - so 1/1.1 and then a second year at 15%, so for the two years it is 1/1.1 x 1/1.15 Instead of using the formula, the alternative is to use the discount tables and multiply by the one year discount factor at 10% and then multiply by the one year discount factor at 15%. I do suggest that you watch the fee lectures on this - using the formula (which is given in the exam) and using the tables are both explained in the lectures.

Mr.Moffat, Could you please reply to first question by wafa as well.

I have absolutely no idea where wafaa gets 146,000 per year from. The revenue is 120,000 per year, and the extra costs are 30,000 per year. So the net cash flow is an inflow of 90,000 per year (together with an additional 20,000 at time 5) I do suggest again that you watch our free lectures - they are a complete course for F2.