A company has invested $160,000 in a project that produced the following cash flows
year 1 $54000
year 2 $66000
year 3 $(60000)
year 4 $57000
year 5 $120000

The cost of capital is 11%.  should this project be done based on the
Net Present Value Method.

Gofigure99 ?

The NPV factor for each year can be used to discount the cash flow for
the cost of money.  In year 1 it would be 1/(1.11) = 0.9009; for year
2 it?s 1/(1.11)^2 = 0.8116; etc.

So we have the following factors to apply to the cash flow:
Year 0 (money invested upfront): 1.0000
Year 1: 0.9009
Year 2: 0.8116
Year 3: 0.7312
Year 4: 0.6587
Year 5: 0.5935

We use these to discount the cash flows involved, with the initial
investment being negative:

NPV OF CASH FLOWS
===================

Year 0: -$160,000
Year 1: $54K x 0.9009 = $48,649
Year 2: $53,566
Year 3: -$43,872
Year 4: $37,546
Year 5: $71,220

TOTAL NPV OF PROJECT = Sum (Year 0 through Year 5) = $7,109

So the NPV is positive and the project should proceed.

Best regards,

Omnivorous-GA

Gofigure99 ?

You can directly find answer using NPV if both cash flows and cost of
capital are in pre-tax /post tax terms. If for example, cash flows are
in pre-tax and cost of capital is in post-tax terms than you will need
to adjust them for tax shield first.

read tax shield for year 3 and tax expense for other years in my previous comment.