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If the discount rate is 0%, what is the project's net present value?
A discount rate of 0% means that future cash flows are worth the same
as present cash flows. Thus, we take the sum of the revenues in years
1 through 3 and subtract the initial investment that took place in year 0.
($90,000 + $190,000 + $900,000) - $800,000
= $1,180,000 - $800,000
= $380,000
The NPV is therefore $380,000.
If the discount rate is 6%, what is the project's net present value?
In this case, the present value of a cash flow C in year N is
C / (1.06^N)
where the divisor is 1.06 to the power of N. We begin by calculating
the present value of the revenue in each of the years 1 through 3.
Year revenue divisor present value
1 $90,000 1.06^1 = 1.06 $90,000 / 1.0600 = $84,905.66
2 $190,000 1.06^2 = 1.1236 $190,000 / 1.1236 = $169,099.32
3 $900,000 1.06^3 = 1.1910 $900,000 / 1.1910 = $755,667.51
Now we take the sum of the present values and subtract the initial
investment.
($84,905.66 + $169,099.32 + $755,667.51) - $800,000
= $1,009,672.49 - $800,000
= $209,672.49
So the NPV is $209,672.49 . |
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