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Week 10 Discussion..edited
Week 10 Discussion..edited
Example 1
Consider project A which has an initial investment of $40000 at a discounted rate of 12% and in
two years it produces the following cash flows: $243000 and $28500. The NPV of the project at
the end of the 2 years is calculated as follows.
NPV = (24300/(1.12))+(28500/(1.12)^2))-40000
= $4416.46
Example 2
Consider project B which has an initial investment of $40000 at a discounted rate of 12% and in
five years it produces the following cash flows: $243000, $28500, $15000, -$30500, and $10000.
The NPV of the project at the end of the 2 years is calculated as follows.
= $41384.13
From the two examples shown above, we can note that one of the cash flows in project B was
negative which negatively affected the NPV of the project. The negative value can be due to the
inflation rate or other factors that affected the cash flow during the fourth year. Therefore, we
can say that the NPV of a long-term investment would be more sensitive to changes in the cost of
capital than the short-term NPV investment.
References
1. Gaspars-Wieloch, H., 2019. Project net present value estimation under
uncertainty. Central European Journal of Operations Research, 27(1), pp.179-197.
2. Zamfir, M., Manea, M.D. and Ionescu, L., 2016. Return on investment–indicator for
measuring the profitability of invested capital. Valahian Journal of Economic
Studies, 7(2), pp.79-86.