NPV Calculation for Project with Capital Spending and Revenues | CFA Level 1 Exam Preparation

Project's Net Present Value (NPV)

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A project requires an initial outlay of 650. It also needs capital spending of 700 at the end of year 1 and 900 at the end of year 2. It has no revenues for the first 2 years but receives 1,200 in year 3, 1,600 in year 4 and 2,300 in year 5. The project's cost of capital is 10%. The project's NPV equals ________.

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A. B. C. D.

D

The discounted cash flow at the end of year N is obtained by dividing that year's cash flow by 1.1N, since the project's cost of capital is 10%. Using this, the discounted cash flows are:

-636, -744, +902, +1,093, +1,428.

The Present value of the cash flows is = -636 - 744 + 902 + 1,093 + 1,428 = $2,043. The net present value of the project = $(2,043 - 650) = $1,393.

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