Business – 10.3 Investment appraisal – Investment appraisal decisions | e-Consult
10.3 Investment appraisal – Investment appraisal decisions (1 questions)
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Answer:
- Discount factor = 1 ÷ (1 + r)^n, where r = 0.08.
- Present values:
| Year | Cash Flow (£) | Discount Factor | PV (£) |
| 0 | -200,000 | 1.0000 | -200,000 |
| 1 | 60,000 | 0.9259 | 55,554 |
| 2 | 70,000 | 0.8573 | 60,011 |
| 3 | 80,000 | 0.7938 | 63,504 |
| 4 | 90,000 | 0.7350 | 66,150 |
| 5 | 100,000 | 0.6806 | 68,060 |
| Total PV | 13,279 | ||
NPV = £13,279 (positive).
Conclusion: Because NPV > 0, the project adds value and should be undertaken.