n NPV
Submitted by arindammaiti on Fri, 09/23/2011 - 17:18
A project would be executed over a span of 2 years. The cash flows are as follows: Year 1: -$2m, Year 2: $2.8m. Assuming a discount rate of 50%, should the project be selected?
Should be project be selected.
I chose yes.
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ramarajuch
Fri, 09/23/2011 - 23:40
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n NPV
Based on my understanding, Discount rate is nothing but intrest rate ( Actually charged to Banks by Fedaral bank / Central Bank). This intrest rate is very high. Hence my answers is not to select project.
Thanks
Ram
arindammaiti
Sat, 09/24/2011 - 01:29
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n NPV
But does interest rate only driving factor here?
Thx,
Arindam
karthik_1505
Tue, 09/27/2011 - 08:36
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Discounted Cashflow & NPV
Hi..If I read the question correctly
Cash flow Year 1 is -$2M (which is investment).Cash flow Year 2 is $2.8M with discount rate of 50%.Lifetime of the project is 2 years.
Solution: Usually we calculate the Cashflow each year and multiply it with Discount rate to derive at PV for each year. Sum up the returns and compare it with the Cost invested to decide on Whether to select this project or not.
For an investment of $100
1. Actual Cashflow is
Cost ----year 1---- year 2---- year 3---- year 4---- year 5
100 ------30--------- 30-------- 30-------- 30--------- 30
2. Discounted Cashflow (Discount rate of 20%) is
Cost ----year 1---- year 2---- year 3---- year 4---- year 5
100 -------25---------21-------- 17-------- 14--------- 12
In Scenario 1, the investment of $100 yields $150($30 every year for 5 years)
In Scenario 2, with the discount rate of 20% (Time value of money), the investment of $100 yields $89 only. So the project should not be selected.
wrt this original query, In this actual problem, there is no initial cost mentioned, only cashflow mentioned in negative (which is investment ?).
with the returns of less than the investment the Project should not be selected.
Just my 2 cents.