Practice Question
If a company has cash inflows of $200,000, $300,000, and $400,000 over three years, what is the NPV if the discount rate is 10%?
Answer +
C
Step-by-step solutions +
Step 1: Use the NPV formula:
NPV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + CF3 / (1 + r)^3
where r = 10% or 0.10
Step 2: Plug in the values: NPV = $200,000 / 1.10 + $300,000 / 1.10^2 + $400,000 / 1.10^3
NPV = $181,818.18 + $247,933.88 + $300,225.93 = $730,000 (approx)
Step 2: Plug in the values: NPV = $200,000 / 1.10 + $300,000 / 1.10^2 + $400,000 / 1.10^3
- $200,000 / 1.10 = $181,818.18
- $300,000 / 1.21 = $247,933.88
- $400,000 / 1.331 = $300,225.93
NPV = $181,818.18 + $247,933.88 + $300,225.93 = $730,000 (approx)