Project Management The Managerial Process 5th edition Larson & Gray

Exercise 2-3:

A five-year project has a projected net cash flow of $15,000, $25,000, $30,000,
$20,000, and $15,000 in the next five years. It will cost $50,000 to implement the
project. If the required rate of return is 20 percent, conduct a discounted cash flow
calculation to determine the NPV.

Chapter 02 Exercise 03 1/2

Project Management The Managerial Process 5th edition Larson & Gray

Answer:

1) Based on the NPV formula :

Ft
NPV =I 0+Σnt =1 where: I 0=Initial investment (Negative number )
(1+k )t
F t =Net cash flow for period t
k =Required rate of retrun
A B C D E F G H
5 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
6 Investment -$50,000
7 Cash Inflows $15,000 $25,000 $30,000 $20,000 $15,000
8 Required Rate of 20%
Return
9 Yearly discounted -50000 12500 17361 17361 9645 6028
value
10 NPV = $12,895 Formula: =C6+NPV(B8,D7:H7)

Example of calculation of the 1 year cash inflow:

st

1
The discounted value for year-1 cash flow = 15,000/(1+20%) = 14,705
2
The discounted value for year-2 cash flow = 25,000/(1+20%) = 24,509
etc …
The project NPV is the sum of all years discounted values = 12,895
Since the NPV is positive, accept project.

Chapter 02 Exercise 03 2/2