ICAEW BIP · Chapter 13 · Question 4 of 9
A project costs £200,000 now. Net cash inflows are expected at the end of each year as follows: year 1 £60,000, year 2 £80,000, year 3 £90,000, year 4 £50,000. The cost of capital is 12%. Discount factors at 12% are: year 1 0.893, year 2 0.797, year 3 0.712, year 4 0.636. What is the net present value of the project?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) £13,220
Explanation
Present values: year 1 £60,000 x 0.893 = £53,580; year 2 £80,000 x 0.797 = £63,760; year 3 £90,000 x 0.712 = £64,080; year 4 £50,000 x 0.636 = £31,800. Total PV of inflows = £213,220. NPV = £213,220 - £200,000 = £13,220.
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