Living Colour Company has a project available with the following cash flows: Year Cash Flow0 −$33,6301 8,2402 9,9303 14,1904 15,9705 10,880 If the required return for the project is 8.8 percent, what is the project's NPV?
Question
Living Colour Company has a project available with the following cash flows: Year Cash Flow0 −$33,6301 8,2402 9,9303 14,1904 15,9705 10,880 If the required return for the project is 8.8 percent, what is the project's NPV?
Solution
To calculate the Net Present Value (NPV) of the project, we need to discount each year's cash flow back to its present value and then sum these values. The formula for calculating the present value is:
PV = CF / (1 + r)^n
where:
- PV is the present value
- CF is the cash flow for the year
- r is the required return rate
- n is the year
Let's calculate the present value for each year:
Year 0: PV0 = -33,630 Year 1: PV1 = 7,573.10 Year 2: PV2 = 8,405.30 Year 3: PV3 = 11,159.56 Year 4: PV4 = 11,537.13 Year 5: PV5 = 7,273.57
Now, we sum these present values to get the NPV:
NPV = PV0 + PV1 + PV2 + PV3 + PV4 + PV5 NPV = -7,573.10 + 11,159.56 + 7,273.57 NPV = $12,318.66
So, the project's NPV at a required return of 8.8 percent is $12,318.66.
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