An investor purchase a machine for 𝑁$ 28371. 00 and expects to sell it for 𝑁$50000. 00 in 5 𝑦𝑒𝑎𝑟𝑠.

Question

What is the expected NPV (Net present Value) for this investment if the investor discount cash flows at 15%?

Answer 1

Hello. As you know, future time flows need to brought to Present time or time 0. In order to do this, they must be discounted using the current discount rate. The investor purchased his machine at time 0 therefore we can say the CF at T0 = -28371.00. The machine is expected to be sold for T5 = 50000. This latter cash flow needs to be discounted. To do this, we use the following formula PV = FV/(1+r)^N. Plugging the values in gives us PV=50000/(1+15%)^5 = 24858.80. Now that both CF are at T0, we can sum them to get an NPV of -3512.16