Initial investment required for a project is estimated $65,000. There is 40% pro
ID: 2738214 • Letter: I
Question
Initial investment required for a project is estimated $65,000. There is 40% probability of success and 60% probability of failure. In case of success, initial investment at present time yields the annual income of $22000 for six years, from first to sixth year with zero salvage value. In case of failure, there will be salvage value of $50,000 at the end of first year without any annual income. Considering minimum ROR 8%, calculate the expected NPV and explain if this investment is satisfactory. Explain your work in detail including all the required equations and calculations.
Explanation / Answer
Success 40% Failure 60% If success, compute Present value of cash flows Year Cash flow PVF @8% PV 0 -65000 1 -65000 1-6 22000 4.6228 101701.6 36701.6 If failure, compute Present value of cash flows Year Cash flow PVF @8% PV 0 -65000 1 -65000 1 50000 0.925926 46296.3 -18703.7 NPV =60%*-18703.7+40%*36701 3458.18