0
$\begingroup$

Let's have a project where we invest 1000 at the beginning of year 1 and 1000 at the beginning of year 2. At the end of year 2 the income is 2200 and the project is closed.

Person A discounted with 5%.

Person B discounted with 10%.

Now I want to calculate the present value and net present value for both of them.

Person A: $PV = \frac{2200}{1.05^2} = 1995.46$

Person A: $NPV =$ Present value of the income - investments $= 1995,46 - (1000 + 1000) = -4.54$

Person B: $PV = \frac{2200}{1.10^2} = 1818.18$

Person B: $NPV = 1818.18 - (1000 + 1000) = -181.82$

Is this correct?

This is a part of a multiple choice question where is no option that the (N)PV of both is positive or negative at the same time. So I guess something is wrong.

$\endgroup$
0
$\begingroup$

No, it's not correct. The 1000 you invest at the beginning of the second year should also be discounted, That 1000 also has a present value. This gives:

$$NPV = \frac{2200}{(1+R)^2} - \frac{1000}{(1+R)} - 1000$$

with $R$ the annual rate.

Remember, you cannot simply add incoming or outgoing cash flows that occur at different times.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.