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Q: Consider the project with the following expected cash flows: ( Answered 5 out of 5 stars,   0 Comments )
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Subject: Consider the project with the following expected cash flows:
Category: Business and Money > Accounting
Asked by: skiphodge-ga
List Price: $20.00
Posted: 09 Jun 2005 03:17 PDT
Expires: 09 Jul 2005 03:17 PDT
Question ID: 531260
Year		 Cash flow
       0		          - $800,000
       1                    90,000
       2                    190,000
       3                 +$900,000
  
If the discount rate is 0%, what is the project's net present value? 
If the discount rate is 6%, what is the project's net present value? 
What is this project's internal rate of return?
Answer  
Subject: Re: Consider the project with the following expected cash flows:
Answered By: leapinglizard-ga on 09 Jun 2005 05:12 PDT
Rated:5 out of 5 stars
 
Dear skiphodge-ga,

My answer follows. If you have any concern at all about my work, please
advise me through a Clarification Request and give me the opportunity
to fully meet your needs before you assign a rating.

Regards,

leapinglizard



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 .
skiphodge-ga rated this answer:5 out of 5 stars

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