Answer :
Answer:
NPV= $777,712.81
Explanation:
Giving the following information:
Initial investment= $8.5 million.
The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years.
Discount rate= 16%
To calculate the net present value, we need to use the following formula:
NPV= -Io + ∑[Cf/(1+i)^n]
Year 1= 2,000,000/1.16= 1,724,137.93
Year 2= 3,000,000/(1.16^2)= 2,229,488.70
Year 3= 4,000,000/(1.16^3)= 2,562,630.69
Year 4= 5,000,000/(1.16^4)= 2,761,455.49
Total= 9,277,712.81
NPV= -8,500,000 + 9,277,712.81= $777,712.81
The net present value of this project is $777,712.81.
Calculation of the net present value:
Since
Initial investment= $8.5 million.
And, The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years.
Also, the Discount rate= 16%
Now the following formula should be applied.
NPV= -Io + ∑[Cf/(1+i)^n]
So,
Year 1= 2,000,000/1.16= 1,724,137.93
Year 2= 3,000,000/(1.16^2)= 2,229,488.70
Year 3= 4,000,000/(1.16^3)= 2,562,630.69
Year 4= 5,000,000/(1.16^4)= 2,761,455.49
Total= 9,277,712.81
Now
NPV= -8,500,000 + 9,277,712.81
= $777,712.81
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