Part 1: Conduct a discounted cash flow calculation to determine the NPV of the f
ID: 444122 • Letter: P
Question
Part 1: Conduct a discounted cash flow calculation to determine the NPV of the foloowing project, assuming a required rate of return of 0.2. The project will cost $75,000 but will result in cash inflows of $20,000, $30,000, and $50,000 in each of the next four years.
Part 2: In the previous problem, assume that the inflows are uncertain but normally distributed with standard deviations of $1000, $1500, $2000, and $3500, respectively. Find the mean forecast NPV using "Crystal Ball". What is the probability the actual NPV will be positive?
Explanation / Answer
1. Discounted Cash Flow NPV = -Project cost + Inflow/(1+r) + Inflow/(1+r)^2.....
r = 0.2
= -75000 +101000/1.2 + 101500/1.2^2 + 102000/1.2^3 + 103500/1.2^4
= 183873.50
2. Mean Forecast =
= -75000 +101000/1.2 + 101500/1.2^2 + 102000/1.2^3 + 103500/1.2^4
probability the actual NPV will be positive
= 45%