Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cash Flow Cash Flow Cash Flow
ID: 2761003 • Letter: P
Question
Project
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Cash Flow
Cash Flow
Cash Flow
Cash Flow
Cash Flow
Cash Flow
A
-14000
6000
6000
6000
6000
6000
B
-15000
7000
7000
7000
7000
7000
C
-18000
12000
2000
2000
2000
2000
The cash flows for three projects are shown above. The cost of capital is 9.5%. The net present value (NPV) of project A is ________.
Project
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Cash Flow
Cash Flow
Cash Flow
Cash Flow
Cash Flow
Cash Flow
A
-14000
6000
6000
6000
6000
6000
B
-15000
7000
7000
7000
7000
7000
C
-18000
12000
2000
2000
2000
2000
Explanation / Answer
NPV = Cash Flow * ( 1 - (1+i)-n)/I - Initial investment Cash Flow = 6000 n = 5 years I = 9.5% = 0.095 NPV = 6000 * ( 1 -( 1+0.095)-3)/0.095 - 14000 = 6000 * ( 1 - 0.6352)/0.095 - 14000 = 6000 * 0.3648/0.095 - 14000 = 6000 * 3.84 - 14000 = 23040 - 14000 = 9040 Hence NPV for Project A = 9040
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