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1.15 NPV Practice Problem
1.15 NPV Practice Problem
All you need to solve the following problem is in the table below. Fill in the cells.
| Year | Free Cash Flow | PVF @ 6 % | PVCF |
| 0 | ($1,00,000) | ||
| 1 | 750,000 | ||
| 2 | 800,000 | ||
| 3 | 810,000 | ||
| 4 | 600,000 | ||
| 5 | 250,000 | ||
| NPV= |
Here’s the solution. Don’t look at it, when solving the problem above…
| Year | Free Cash Flow | PVF @ 6 % | PVCF |
| 0 | ($1,00,000) | 1.0 | ($1,00,000) |
| 1 | 750,000 | 0.9434 | 707,550 |
| 2 | 800,000 | 0.8900 | 712,000 |
| 3 | 810,000 | 0.8396 | 680,076 |
| 4 | 600,000 | 0.7921 | 475,260 |
| 5 | 250,000 | 0.7473 | 186,825 |
| NPV= | $1,761,711 |
Remember: The NPV is arrived at by using the company’s cost of capital as the discount rate.