Hello.
The book gives the definition of NPV as "the difference between the present value of a projec and the present value of its cost."
The formula is:
NPV = PV(benefits) - PV(cost)
The problem:
You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $9.8 million today and $4.6 million in one year. The government will pay you $20.0 million in one year upon the building’s completion. Suppose the interest rate is 10.0%
. What is the NPV?
--------------------
Essentially, I've found the PV by dividing $20 by 1.10 giving me $18.18.
Then to find the NPV I subtracted $18.18 by the $9.8 million needed to day and got $8.38 NPV.
Is it correct to do this method instead: Subtracting $18.18 by & $14.4 (9.8 + 4.6)?
Please advise. Thanks
The book gives the definition of NPV as "the difference between the present value of a projec and the present value of its cost."
The formula is:
NPV = PV(benefits) - PV(cost)
The problem:
You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $9.8 million today and $4.6 million in one year. The government will pay you $20.0 million in one year upon the building’s completion. Suppose the interest rate is 10.0%
. What is the NPV?
--------------------
Essentially, I've found the PV by dividing $20 by 1.10 giving me $18.18.
Then to find the NPV I subtracted $18.18 by the $9.8 million needed to day and got $8.38 NPV.
Is it correct to do this method instead: Subtracting $18.18 by & $14.4 (9.8 + 4.6)?
Please advise. Thanks