Using the method of your choice, calculate the Net Present Value of the following cash flows.
Assume that the required return on this project is 15%
Project A
Initial Cost -$ 150
Year 1 $ 175
Year 2 $ 100
A. $15
B. $35
C. $55
D. $70
E. $78
Answer: E. $78
Project A Discounted Inflows (@ 15%)
Initial Cost -$ 150
Year 1 $ 175 $175/1.15 = $152
Year 2 $ 100 $100 / (1.152) = $76
Compare to the $150 estimated cost:
NPV = -$150 + ($152 + $76) = $78
Remember: The Net Present Value represents the amount of value that will be added (positive NPV) or subtracted (negative NPV) if the project is taken on.
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