Smedworth & Formby Limited is considering the investment of £250 000 in a machine at time 0.It is estimated that the machine will produce cash inflows of £125 000 in year 1, £116 000 in year 2 and £107 000 in year 3.The company's cost of capital is 9%. What is the net present value of the investment (to the nearest £)?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash inflows at the company's cost of capital and then subtracting the initial investment. Using the given cash inflows and a discount rate of 9%, the NPV calculation is as follows:Year 1: £125,000 / (1 + 0.09)^1 = £114,679.45Year 2: £116,000 / (1 + 0.09)^2 = £97,651.38Year 3: £107,000 / (1 + 0.09)^3 = £83,606.17Total NPV = £114,679.45 + £97,651.38 + £83,606.17 - £250,000 = £45,936.99 ≈ £44,937 (to the nearest £).

Smedworth & Formby Limited Is Considering the Investment of £250