Morgana Fitzhoward Limited is planning an investment in a machine of £400 000 at time 0.It is projected that cash flows arising from this investment will be £168 000 in year 1, £238 000 in year 2, and £242 000 in year 3. The company's cost of capital is 14%.
What is the net present value of the project (to the nearest £)?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows back to their present value and then subtracting the initial investment. Using the given cash flows and a discount rate of 14%, the calculation is as follows:Year 1: £168,000 / (1 + 0.14)^1 = £147,368Year 2: £238,000 / (1 + 0.14)^2 = £183,431Year 3: £242,000 / (1 + 0.14)^3 = £170,062Sum of present values = £147,368 + £183,431 + £170,062 = £500,861Subtracting the initial investment of £400,000 gives an NPV of £100,861, which, when rounded to the nearest £, is £93,861.

Morgana Fitzhoward Limited Is Planning an Investment in a Machine