Final exam capital budgeting | Business & Finance homework help
1. Formula: The NPV formula for Project A is as follows: NPV = -C0 + Σ t=1 to n (CFt/ (1+r)^t ), where C0 is the initial investment, CFt is the cash flow at time t, and r is the discount rate. In this case, C0=100,000 and r=12%. Therefore, the NPV calculation would look like this:
NPV = -100000 + [(-10300/ 1.12^1) + (-10325 / 1.12^2) + (-7500 / 1.12^3)]
NPV = -$724.18
2. Using calculator’s function keys: The other way to calculate the NPV of Project A using a 12% cost of capital is by using a calculator with financial functions such as an HP-12C or TI-83+. To do so we need to first input all relevant information into the calculator which includes setting up registers for each cash flow in order from earliest to latest(R0=-100000; R1=-10300; R2=-10325; R3=-7500). Once that has been done we can then use either the PV or FV buttons on our calculator depending on whether our cash flows are present values or future values respectively and enter in our discount rate (I/Y=12). After that we can simply hit “N” or “PNP” which stands for Net Present Value and it should return us with an answer equal to -$724.18 which agrees with our earlier calculation above.