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X co. is considering a project which would cost $50,000 now and yield $9000 per annum every year in perpetuity, starting a year from now. The cost of capital is 15%.Calculate the NPV of the project.
Answer: Year Cash flow Discount factor Present Value
$ 15% $
0 (50,000) 1.0 (50,000)
1-infinity 9,000 1/0.15 60,0000
so, NPV is 10000.This math is not a problem. I solved it another way. But, I need to know why discount factor is (1/.15) at 1-infinity. Another thing I wanna know why discount rate 15% is called ” The cost of capital”. what does it mean?
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