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  • NPV Calculation

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    Joraine Robinson
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    The document provides an example of calculating the net present value (NPV) of a project with an initial investment of $1000 over 4 years with an annual cash inflow of $400 and a discount rate of 20%. It walks through discounting each of the 4 annual cash flows and summing them to get the NPV of $35.49, indicating the project is worth undertaking since the NPV is positive.

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    The document provides an example of calculating the net present value (NPV) of a project with an initial investment of $1000 over 4 years with an annual cash inflow of $400 and a discount rate of 20%. It walks through discounting each of the 4 annual cash flows and summing them to get the NPV of $35.49, indicating the project is worth undertaking since the NPV is positive.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    11 views1 page

    NPV Calculation

    Uploaded by

    Joraine Robinson
    The document provides an example of calculating the net present value (NPV) of a project with an initial investment of $1000 over 4 years with an annual cash inflow of $400 and a discount rate of 20%. It walks through discounting each of the 4 annual cash flows and summing them to get the NPV of $35.49, indicating the project is worth undertaking since the NPV is positive.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 1

    NPV = net present value

    Rt = net cash flow at time t

    i = discount rate

    t = time of the cash flow

    note: Rt = cash inflow – cash outflow, at time t

    Net Present Value (NPV) Example

    • Initial investment: $1000

    • Time: 4 years

    • Discount rate: 20%

    • Annual cash flow: $400 per year

    Use the values given to calculate NPV.

    NPV Calculation

    Year 1: 400/(1 + 0.2)1 = 400/1.2 = 333.33

    Year 2: 400/(1 + 0.2)2 = 400/1.44 = 277.78

    Year 3: 400/(1 + 0.2)3 = 400/1.728 = 231.48

    Year 4: 400/(1 + 0.2)4 = 400/2.0736 = 192.9

    NPV = (333.33 + 277.78 + 231.48 + 192.9) – 1000

    = 1035.49 – 1000

    = 35.49

    Base on the calculated NPV the project is worth undertaking. This is because the NPV is a positive value.

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