- 4 Marks
FM – L2 – Q82 – Discounted Cash Flow
Question
A company has a cost of capital of 10%. Calculate the NPV of an investment project with the following estimated cash flows:
| Years | Cash flow each year |
|---|---|
| GH₵ | |
| 0 | (70,000) |
| 1 | 15,000 |
| 2–4 | 12,000 |
| 5–10 | 8,000 |
State whether the project should be undertaken.
Answer
Workings
Discount factor at 10%
Annuity factor, years 1–4: 3.170
Discount factor, Year 1: 0.909
Annuity factor, years 2–4: 2.261
Annuity factor, years 1–10: 6.145
Annuity factor, years 5–10: 2.975
Cost of capital 10%
| Year | Cash flow | Discount factor | PV |
|---|---|---|---|
| GH₵ | |||
| 0 | (70,000) | 1.000 | (70,000) |
| 1 | 15,000 | 0.909 | 13,635 |
| 2–4 | 12,000 | 2.261 | 27,132 |
| 5–10 | 8,000 | 2.975 | 23,800 |
| NPV | (5,433) |
The project has a negative NPV and so should not be undertaken.
- Tags: Cash Flows, Cost of Capital, Discounted cash flow, investment appraisal, NPV
- Level: Level 2
- Topic: Discounted cash flow
- Uploader: Samuel Duah