A project generates a revenue of $100.00 today for a service to be performed one year from today at a cost of $110.00. Which discount rate will make the NPV greater than zero?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount the future cash flow at a specific rate. The formula for NPV is:

NPV = CF/(1+r)^n - C

Where CF is the cash flow, r is the discount rate, n is the time period, and C is the cost.

In this case, CF is $100, C is $110, and n is 1 year.

Using trial and error method:

At 8% APR, NPV = $100/(1+0.08) - $110 = -$4.63
At 9% APR, NPV = $100/(1+0.09) - $110 = -$3.67
At 10% APR, NPV = $100/(1+0.1) - $110 = -$2.73
At 11% APR, NPV = $100/(1+0.11) - $110 = -$1.81

Therefore, at 11% APR, the NPV becomes positive and greater than zero, indicating that this is the minimum discount rate required to make the project financially viable.

A Project Generates a Revenue of $100