Calculate NPV and Discount Rate for Investment
What is the NPV if the discount rate is zero?
NPV $ ______
What is the NPV if the discount rate is infinite?
NPV $ _____
At what discount rate is the NPV just equal to zero?
Discount rate _______ %
NPV and Discount Rate Calculation
To calculate the NPV of the investment with the given cash flows:
NPV = -$564,382 + $193,584/(1+0)^1 + $237,318/(1+0)^2 + $185,674/(1+0)^3 + $153,313/(1+0)^4
NPV = $205,507
At a discount rate of infinite percent, the NPV can be calculated as:
NPV = -$564,382 + $193,584/1 + $237,318/1 + $185,674/1 + $153,313/1
NPV = -$1,335,271
To find the discount rate at which the NPV is zero:
NPV = -$564,382 + $193,584/(1+r)^1 + $237,318/(1+r)^2 + $185,674/(1+r)^3 + $153,313/(1+r)^4 = 0
The discount rate at which the NPV is zero is approximately 12.69%
Understanding NPV and Discount Rate for Investment
NPV (Net Present Value) is a financial metric used to determine the profitability of an investment by comparing the present value of cash inflows with the present value of cash outflows. A positive NPV indicates that the investment is expected to generate positive returns, while a negative NPV signifies that the investment may result in losses.
In the given scenario, the NPV of the investment at a discount rate of 0% is calculated to be $205,507. This means that at a zero discount rate, the investment is expected to yield positive returns.
On the other hand, when the discount rate is infinite, the NPV turns negative, amounting to -$1,335,271. This suggests that at an infinite discount rate, the investment is likely to result in significant losses.
By using the formula to find the discount rate at which the NPV is zero, we arrive at approximately 12.69%. This indicates the rate at which the present value of cash inflows equals the present value of cash outflows, resulting in a breakeven scenario for the investment.