Net present value (NPV) is defined as the difference between the present value of all the benefits and costs, as shown in the following formula:
Assume that we have a 5-year project with an initial investment of $100 million. The future cash flows at the end of each year for the next five years are $20m, $40m, $50m, $20m, and $10m, respectively. If the discount rate for such type of investments is 5 percent per year, should we take the project? First, we have to estimate the NPV of our project. Second, we have to apply the following decision rule (the NPV rule):
If we manually estimate the NPV, we can do the following calculations
>>>-100 + 20/(1+0.05)+40/(1+0.05)**2 +50/(1+0.05)**3+20/(1+0.05)**4+10/(1+0.05)**5 22.80998927303707
Since the NPV of our project is positive, we should accept it.
It is quite tedious to type each value. For example, we typed 0.05
(the r
value) five times. To make our typing a little easier, we could assign a value to r...