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Question:
An investor is interested in the following piece of property:
• The property will cost $200,000 at time zero.
It will provide cash flows of $50,000 in year 1, $60,000 in year 2, $70,000 in year 3, and $80,000 in year 4.
A $20,000 investment will be required in year 5 as the property will have some environmental contamination and will have to be restored to its original condition.
What is the NPV of the project if the investor’s required rate of return is 10%?
A
-$10,144.
explanation
Calculate the NPV as in any other project. Discount the cash flows back at a rate of 10%. CF0 = -200,000; CF, = 50,000; CP2 = 60,000; CF3 = 70,000; CF4 = 80,000; CF5 = -20,000; I/Y = 10; CPT -> NPV = -$10,144.
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