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good evening!
an investment of 40,000 today is expected to give annual contribution of 25,000. this is based on selling one product at 12.50 an variable cost of 10. annual fixed cost of 10,000 will be incurred for the next 4 years. the discount rate is 10%
the questions asks to calculate various sensitivities which i did, EXCEPT for one: the discount rate
the answer says since the initial investment is 40000, for the npv=0
0 — (40000) —- 1—–(40000)
1-4–15000——-XX—–40000
—————————————-
NPV===============0and the af is 40000/15000 and so on…
my question: where is he getting the 15,000 from??
regards
The net cash flow for each of the 4 years = 25,000 (contribution) – 10,000 (fixed costs) = 15,000.
(Contribution is the profit before fixed costs)
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