1.) Chance, Inc. is considering a project with an initial cost of $1.03 million.
ID: 2805090 • Letter: 1
Question
1.) Chance, Inc. is considering a project with an initial cost of $1.03 million. The project will not produce any cash flows for the first two years. Starting in year 3, the project will produce cash inflows of $657,000 a year for 8 years. This project is risky, so the firm has assigned it a discount rate of 20.2 percent. What is the net present value?
2.) What is the net present value of a project that has an initial cost of $83,000 and produces cash inflows of $23,000 a year for 10 years if the discount rate is 15 percent?
Thank you!!!
Explanation / Answer
1)
The net present value = Present Value of Cash Inflows - Present Value of Cash Outflows
= [ $ 657,000 * 1/(1.202)^3 + $ 657,000 * 1/(1.202)^ 4 + $ 657,000 * 1/(1.202)^5 + $ 657,000 * 1/(1.202)^6+$ 657,000 * 1/(1.202)^7 + $ 657,000 * 1/(1.202)^8 + $ 657,000 * 1/(1.202)^ 9 + $ 657,000 * 1/(1.202)^10] - $ 1,030,000
= $ 1,734,535.52 - $1,030,000
= $ 704,535.52
Hence the correct answer is $ 704,535.52
2)
The net present value = Present Value of Cash Inflows - Present Value of Cash Outflows
=[$ 23,000 * 1/(1.15) ^ 1+ $ 23,000 * 1/(1.15) ^ 2+ $ 23,000 * 1/(1.15) ^ 3+ $ 23,000 * 1/(1.15) ^ 4+ .... +
+ $ 23,000 * 1/(1.15) ^ 10 ] - $ 83,000
= $ 115,431.68- $ 83,000
= $ 32,431.68
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