- May 23, 2022 at 6:26 pm #656273sarbrinaParticipant
- Topics: 22
- Replies: 49
Hi Mr. Maffot,
I have tried to attempt this question many times. However I’m not getting the answer. Can you please explain this question and answer.
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)?
D $116,500May 23, 2022 at 8:31 pm #656283John MoffatKeymaster
- Topics: 56
- Replies: 51576
Does your book not show the workings for the answer?
The PV of the cash inflow at time 1 is 750,000 x (1/1.1)
or, alternatively 750,000 x the 1 year discount factor at 10%
The PV of the cash inflow at time 2 is 500,000 x (1/1.1) x (1/1.15)
or, alternatively, 500,000 x the 1 year discount factor at 10% x the 1 year discount factor at 15%
Using the discount factors from the tables will give a slightly different answer because of the rounding in the tables, but to the nearest 500 it will not make a difference 🙂
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