Net Present Value: A company plans to finance a project costing $1,000,000...

Question

A company plans to finance a project costing $1,000,000. They expect to generate cash flows of $300,000 in Year 1, $400,000 in Year 2, and $500,000 in Year 3. If the discount rate is 10%, calculate the NPV of the project and determine if the project should be accepted.

• Answer

  79,682.640

• Step-by-step solutions

  Step 1: Define Key Variables

  • Initial Investment: $1,000,000

  • Cash Flows:

    • Year 1: $300,000

    • Year 2: $400,000

    • Year 3: $500,000

  • Discount Rate: 10%

  Step 2: Calculate Present Values

  • PV Year 1 = $300,000 ÷ (1 + 0.10)¹ = $272,727.27

  • PV Year 2 = $400,000 ÷ (1 + 0.10)² = $330,578.51

  • PV Year 3 = $500,000 ÷ (1 + 0.10)³ = $375,657.53

  Step 3: Calculate NPV

  NPV = PV Year 1 + PV Year 2 + PV Year 3 − Initial Investment
  NPV = $272,727.27 + $330,578.51 + $375,657.53 − $1,000,000
  NPV = $79,682.64