Project Management: Achieving Competitive Advantage, Fifth Edition

Solved Problems

3.1 NET PRESENT VALUE

Your firm is trying to decide whether to invest in a new project opportunity based on the following information. The initial cash outlay will total $250,000 over two years. The firm expects to invest $200,000 immediately and the final $50,000 in one year’s time. The company predicts that the project will generate a stream of earnings of $50,000, $100,000, $200,000, and $75,000 per year, respectively, starting in Year 2. The required rate of return is 12%, and the expected rate of inflation over the life of the project is forecast to remain steady at 3%. Should you invest in this project?

SOLUTION

To answer this question, we need to organize the following data in the form of a table:

1. $\text{Total outflow}=\$250$