A project has an initial cost of $55,000, expected net cash inflows of $14,000 per year for 7 years, and a cost of capital of 14%

Finance Dec 09, 2020

A project has an initial cost of $55,000, expected net cash inflows of $14,000 per year for 7 years, and a cost of capital of 14%. What is the project's NPV?

Expert Solution

Initial Cost = $55,000 | Expected Net Cash inflows each year = $14,000 | Time of the project = 7 years

Cost of Capital = 14%

We know, NPV of the project = Present Value of all cash inflows - Initial cost

Using Annuity, we can calculate the PV of all cash inflows.

PV of all cash inflows = (Net Cash inflow / Cost of capital) * (1 - (1 + Cost of capital)^-T)

Putting values, PV of all cash inflows = (14,000 / 14%) * (1 - (1 + 14%)^-7) = 100,000 * 0.600363

PV of all cash inflows = $60,036.27

Putting PV of all cash inflows in NPV expression, NPV of the project = 60,036.27 - 55,000

Hence, NPV of the project = $5,036.27

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