A project costs $200,000, produces annual cash inflows of $20,000, and has a dis

Question

A project costs $200,000, produces annual cash inflows of $20,000, and has a discount rate of 8%. Explain how you can quickly determine the difference in the NPV of the project if the cash inflows last only 30 years rather than 40 years. Show the calculations needed to determine the amount of the NPV difference.
A project costs $200,000, produces annual cash inflows of $20,000, and has a discount rate of 8%. Explain how you can quickly determine the difference in the NPV of the project if the cash inflows last only 30 years rather than 40 years. Show the calculations needed to determine the amount of the NPV difference.
A project costs $200,000, produces annual cash inflows of $20,000, and has a discount rate of 8%. Explain how you can quickly determine the difference in the NPV of the project if the cash inflows last only 30 years rather than 40 years. Show the calculations needed to determine the amount of the NPV difference.

Explanation / Answer

Cash outflow $ 200,000.00 Cash inflow each year for 30 years $    20,000.00 Rate o return 8% (P.V of annuity 8% for 30 years) 11.258 P.V of annuity 8% for 40 years 11.925 NPV=P.V of cash inflow-P.V of cash outflow NPV=($20000*11.258)-$200000 $    25,160.00 NPV=P.V of cash inflow-P.V of cash outflow NPV=($20000*11.925)-$200000 $    38,500.00 Difference in NPV=($38500-$25160) $    13,340.00

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