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A company considers a new project for which the following information is available:
Initial cost £300,000
Expected life 5 years
Estimated scrap value £20,000
Additional revenue from the project £120,000/year
Incremental costs of the project £30,000/yr
Cost of capital 10%
What is NPV?
Please help, I am confused what figures to consider and what figures to ignore
You consider all future cash flow effects on the company.
At time 0 there is an outflow of 300,000
At time 5 there is a cash inflow of 20,000 0 you discount this using the normal discount factor for 5 years at 10%
From years 1 to 5 there is a net inflow of 90,000 (the extra revenue less the incremental (which means extra) costs). Because this is an annuity of 90,000 a year for 5 years you discount this using the annuity factor for 5 years at 10%
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