A project requires an initial outlay of 96000 and produces the returns of 32000, 38000 and 50000 at the end of years 1, 2, and 3, respectively. If the market rate is 7%, find the net present value of the project.

Solution

A p ro j ec t re q u i res an ini t ia l o u tl a y o f 96000 an d p ro d u ces t h e re t u r n s o f 32000, 38000 an d 50000 a t t h e e n d o f ye a rs 1, 2, an d 3, res p ec t i v e l y . I f t h e ma r k e t r a t e i s 7%, f in d t h e n e t p rese n t v a l u e o f t h e p ro j ec t .

Principal : 1.63

Solution steps

Translate the problem into an equation:

3 = P (1 + 0.07 \cdot 12)

Solve for

P, 3 = P (1 + 0.07 \cdot 12) : P = 1.63

Principal : 1.63