Net present value: What is the net present value of this project?

Question

Quizplus · Accepted Answer

The net present value is the sum of the present values of all future cash flows. The present value of a cash flow is the amount of money that would need to be invested today to produce that cash flow in the future, given a certain discount rate. The discount rate is the rate of return that could be earned on an alternative investment with similar risk.In this case, the discount rate is 10%. The present value of the cash flows for the first year is $100,000 / (1 + 0.10) = $90,909. The present value of the cash flows for the second year is $120,000 / (1 + 0.10)^2 = $109,091. The present value of the cash flows for the third year is $140,000 / (1 + 0.10)^3 = $128,205. The present value of the cash flows for the fourth year is $160,000 / (1 + 0.10)^4 = $148,333. The present value of the cash flows for the fifth year is $180,000 / (1 + 0.10)^5 = $169,444.The net present value is the sum of the present values of all future cash flows, which is $90,909 + $109,091 + $128,205 + $148,333 + $169,444 = $890,197.

Net Present Value: What Is the Net Present Value of This