NPV Question

Submitted by AnuMahesh on Mon, 10/04/2010 - 14:51

 Assume a discount rate of 2% per year and an investment of 100.000€. You expect to receive revenue of 20.000€ in the first year and 45.000€ in the second year. What is the approximate projected Net Present Value (NPV) of your investment at the end of year two?

A. -37.000 €

B. -35.000 €

C. -36.000 €

D. -34.000 €

 

Answer is B. Can someone please help explain how it was arrived at 

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gtejwani

Mon, 10/04/2010 - 15:49

Net present value is more accurately the present value of the net revenues from an investment, which is revenues minus investment. See the following example:

Payment  

Cash inflow

  

Comment
Investment:   € -100,000   Expense, therefore negative
Revenue year 1:   € 20,000    
Revenue year 2:   € 45,000    
           
Total revenues (2y):   € 65,000    
Net revenues (2y):   € -35,000   Total revenues minus investment

Discount rate:
  • A high discount rate favors quick win projects.
  • A low discount rate favors expansive projects.

 

AnuMahesh

Mon, 10/04/2010 - 16:35

Sorry.. the correct answer was 37,155 which was option 1...Would you know how?.

Below was the explanation. Can't figure out how the NPV was reached and what formula

 

Year Expense Revenue Discount NPV
----- ------- ------- -------- ---------
0 100,000 0 1.000 -100,000
1 0 20,000 0.980 19,600
2 0 45,000 0.961 43,245
--------

?NPV -37,155 

gtejwani

Tue, 10/05/2010 - 04:19

 Hi,

  For more informatin visit 

http://pmi.books24x7.com/viewer.asp?bkid=32027&destid=978#978

here  we are calculating 

PV=Fv/(1+r)n

 

for 1 st year 

Cash flow =20,000/(1+.02)

=19607

here n = 1

for 2nd year  n=2

=45000/(1+.02)2

=45000/1.0404

=43253

 

PaymentYear

Cash inflow

Discounted cash flow

Investment:0$-100,000-100,000Revenue year 1:1$20,00019,607Revenue year 2:2$45,00043,253

Total revenues (2y): $65,00062,859.60Net revenues (2y): $-35,00037,140

(NPV)

 

 

 

 

gtejwani

Tue, 10/05/2010 - 04:34

 

 Hi,

  For more informatin visit 

http://pmi.books24x7.com/viewer.asp?bkid=32027&destid=978#978

here  we are calculating 

PV=Fv/(1+r)n

 

for 1 st year 

Cash flow =20,000/(1+.02)

=19607

here n = 1

for 2nd year  n=2

=45000/(1+.02)2

=45000/1.0404

=43253

          Payment Year Cash inflow Discounted cash flow Investment: 0 $ -1,00,000 -1,00,000 Revenue year 1: 1 $ 20,000 19,607 Revenue year 2: 2 $ 45,000 43,253             Total revenues (2y): $ 65,000 62,860 Net revenues (2y):   -35,000

-37,140(NPV)

 

  PaymentYear

Cash inflow

Discounted cash flow