Practice Problem – NPV

Practice Question

Cases in Finance
Capital Budgeting
NPV
Short Answer

The Majestic Mulch and Compost Company is considering a project that will cost $800,000 with projected cash flows of $200,000 annually for 5 years. What is the project’s NPV if the discount rate is 10%?

Answer +
A
Step-by-step solutions +

Step 1: Apply the NPV formula:

NPV = -Initial Investment + Σ (Cash Flow / (1 + r)^t)

Step 2: Insert values:

NPV = -800,000 + 
      (200,000 / 1.10^1) + 
      (200,000 / 1.10^2) + 
      (200,000 / 1.10^3) + 
      (200,000 / 1.10^4) + 
      (200,000 / 1.10^5)

Step 3: Calculate:

NPV ≈ -800,000 + 181,818 + 165,289 + 150,263 + 136,602 + 124,184 
    ≈ -800,000 + 758,156 = $50,000