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NPV example excercise
#analyst-notes #cfa-level-1 #corporate-finance #has-images #reading-35-capital-budgeting #study-session-10 #subject-2-investment-decision-criteria
Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k)t where k is the cost of capital and t is the year number. Calculate the NPV for Project A and B above.
NPV = CF0 + CF1 + CF2 + CF3 + CF4
Project A's NPV = -1,000 + 750/1.101 + 350/1.102 + 150/1.103 + 50/1.104 = -1,000 + 682 + 289 + 113 + 34 = $118 (rounded)
Project B's NPV = -1,000 + 100/1.101 + 250/1.102 + 450/1.103 + 750/1.104 = -1,000 + 91 + 207 + 338 + 512 = $148 (rounded)
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