1. Calculate Net Present Value for
Initial investment = 20000, Discount rate = 5% and gets back 45000 in next year
Solution:
initial investment = 20000
`i=5%=0.05` per year (Interest rate)
`FV=45000` (Future value)
Single cash flow NPV
`PV=(FV)/((1+i)^t)`
`PV=(45000)/((1+0.05)^1)`
`=(45000)/(10.05)`
`=42857.14`
Net present value formula,
`NPV=(FV)/((1+i)^t)` - initial investment
`=42857.14-20000`
`=22857.14`
Since NPV is greater than 0, so manager should accept project.
2. Calculate Net Present Value for
Initial investment = 5000, Discount rate = 10% and gets back 5600 in next year
Solution:
initial investment = 5000
`i=10%=0.1` per year (Interest rate)
`FV=5600` (Future value)
Single cash flow NPV
`PV=(FV)/((1+i)^t)`
`PV=(5600)/((1+0.1)^1)`
`=(5600)/(10.1)`
`=5090.91`
Net present value formula,
`NPV=(FV)/((1+i)^t)` - initial investment
`=5090.91-5000`
`=90.91`
Since NPV is greater than 0, so manager should accept project.
This material is intended as a summary. Use your textbook for detail explanation.
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