To calculate the net present value (NPV), we need to discount each cash inflow back to its present value and subtract the initial capital investment.
NPV = (CF1 / (1 + r)^1) + (CF2 / (1 + r)^2) + (CF3 / (1 + r)^3) + (CF4 / (1 + r)^4) + (CF5 / (1 + r)^5) - Initial Investment
Where,
CF1 = Cash inflow in year 1 = Rs. 1,000
CF2 = Cash inflow in year 2 = Rs. 2,500
CF3 = Cash inflow in year 3 = Rs. 3,500
CF4 = Cash inflow in year 4 = Rs. 2,650
CF5 = Cash inflow in year 5 = Rs. 4,150
r = Discount rate = 9%
Initial Investment = Rs. 10,000
NPV = (1,000 / (1 + 0.09)^1) + (2,500 / (1 + 0.09)^2) + (3,500 / (1 + 0.09)^3) + (2,650 / (1 + 0.09)^4) + (4,150 / (1 + 0.09)^5) - 10,000
NPV = (1,000 / 1.09) + (2,500 / 1.1881) + (3,500 / 1.29503) + (2,650 / 1.4060356) + (4,150 / 1.53862494) - 10,000
NPV = 917.43 + 2105.29 + 2702.45 + 1882.65 + 2698.18 - 10,000
NPV = Rs. 1306.99
Therefore, the net present value (NPV) of the investment is Rs. 1306.99. This means that the investment is expected to generate a positive return after considering the discount rate.
For a company, from the following information, Calculate net present value
Capital investment Rs 10,000
Expected Inflow in First Year Rs. 1,000
Expected Inflow in Second Year Rs. 2,500
Expected Inflow in Third Year - Rs. 3,500
Expected Inflow in Fourth Year Rs. 2,650
Expected Inflow in Fifth Year Rs 4,150
Discount Rate=9%
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