A project has an initial cost of $62,275, expected net cash inflows of $11,000 per year for 12 years, and a cost of capital of 8%. What is the project’s NPV?

Problem 10-01 npv | Business & Finance homework help

Net Present Value (NPV) is a measure of the present value of a project’s future cash flows. NPV helps to determine whether or not an investment should be made and can be calculated by taking the expected net cash inflows per period, subtracting the initial cost, and then discounting each individual cash flow at the cost of capital.

In this case, given an initial cost of $62,275 and expected net cash inflows of $11,000 per year for 12 years with a cost of capital rate 8%, we can calculate the NPV as follows:

First, we need to calculate the total present value (PV)of all future cash flows over 12 years using Discounted Cash Flow (DCF) method. Using DCF formula PV = CF1/(1+r^n) + CF2/(1+r^n-1)+…+CFT/(1+r^0), where n is number of time periods in our case 12 and r is 8% discount rate:

PV= 11000/[(1+.08^12)] + 11000/[(1+.08^11)] + … + 11000/[(1+.08^0)] = 124454.95

Now that we have determined total PV of all future flows over 12 years given 8% discount rate, we can easily compute NPV by subtracting initial investment from PV:

NPV = 124454.95 – 62275 = 62179.95

Therefore, based on these inputs provided above for this particular project its NPV would be equal to $62179.95 which indicates that it should be accepted since its positive indicating that it will add more money into business than what was initially invested into it when discounted back at 8%.