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Using the method of your choice, calculate the Net Present Value of the following cash flows. Assume that the required return on this project is 15%  Project AInitial Cost -$ 150  Year 1 $ 175  Year 2 $ 100

Question

Using the method of your choice, calculate the Net Present Value of the following cash flows. Assume that the required return on this project is 15%  Project AInitial Cost -150 Year1 150  Year 1 175  Year 2 $ 100

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Solution

Sure, here's how you can calculate the Net Present Value (NPV) of Project A:

  1. Identify the cash flows: The initial cost is -150,thecashinflowinYear1is150, the cash inflow in Year 1 is 175, and the cash inflow in Year 2 is $100.

  2. Identify the discount rate: The required return on this project is 15%, so we'll use this as our discount rate.

  3. Calculate the present value (PV) of each cash flow:

    • For the initial cost, the PV is simply the cost itself, which is -$150.
    • For Year 1, the PV is 175/(1+0.15)1=175 / (1 + 0.15)^1 = 152.17
    • For Year 2, the PV is 100/(1+0.15)2=100 / (1 + 0.15)^2 = 75.61

  4. Sum up all the present values to get the NPV:

    NPV = -150+150 + 152.17 + 75.61=75.61 = 77.78

So, the Net Present Value of Project A is 77.78.Thismeansthattheprojectisexpectedtogenerateaprofitof77.78. This means that the project is expected to generate a profit of 77.78 in today's dollars, after taking into account the time value of money and the required return of 15%.

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