Calculate the NPV of a project requiring a $3,000 investment followed by an outflow of $500 in Year 1, and inflows of $1,000 in Year 2 and $4,000 in Year 3. The cost of capital is 12%. (Round to nearest $)

Question

Quizplus · Accepted Answer

The NPV (Net Present Value) is calculated using the formula: NPV = ∑ [(Ct) / (1 + r)^t] - C0, where Ct is the cash flow at time t, r is the discount rate (cost of capital), and C0 is the initial investment. For this project: Year 0: -$3,000 (initial investment) Year 1: -$500 Year 2: +$1,000 Year 3: +$4,000 With a discount rate of 12%: NPV = -3,000 + (-500 / (1 + 0.12)^1) + (1,000 / (1 + 0.12)^2) + (4,000 / (1 + 0.12)^3) = -3,000 - 446.43 + 797.19 + 2,846.72 = $197.48, rounded to $198.

Calculate the NPV of a Project Requiring a $3,000 Investment