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)
A. ($12000)
B. ($55000)
C. $77000
D. $116500
Ask the Tutor ACCA MA
Project Appraisal
12y ago#1Discount the year 1 cash flow by 1 year at 10%
Discount the year 2 cash flow by 1 year at 15% and then by 1 year at 10%
Then you will have it :-)
Hi sir.. sorry but I still don't get it. Could you please explain in details.
Thank you
12y ago#3I assume that you have watched my lecture on investment appraisal?
If so, then you will know that in order to discount the year 1 flow of 750,000, you multiply by the one year discount factor at 10%.
In order to discount the year 2 flow of 500,000, you would usually multiply by the 2 year discount factor at the cost of capital. However, because here the cost of capital changes, you discount for 1 year at 10% (i.e. multiply by the one year discount factor at 10%) and then by another year at 15% (so multiply the figure you now have by the 1 year discount factor at 15%).
Ok got it Sir Thnx a lot
12y ago#5You are welcome :-)
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