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Assume that Goodrich Petroleum Corporation is evaluating a capital expenditure proposal that has the following predicted cash flows: Initial Investment …….. $(160,000)OperationYear 1 ……………… $ 42,000Year 2 ……………… $ 95,000Year 3 ……………… $ 65,000Salvage …………....... $ 0Using a discount rate of 10%, calculate the net present value of the investment proposal.

Answer :

SuchandraC

Net present value of the investment proposal is $5,529.68 (Approx)

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

How to calculate net present value?

Since, net present value is the difference between cash inflows and cash outflows, thus first we will calculate present value of inflows.

Calculation :

Present value of inflows = cash inflow × present value of discounting factor(rate% , time period)

= $42,000/1.1+ $95,000/1.1^2 + $65,000/1.1^3

=$1,65,529.68 (Approx)

We know, present value of outflows, thus net present value is

NPV = Present value of inflows - present value of outflows

=$1,65,529.68 - $1,60,000

=$5,529.68 (Approx)

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