Question 1

Windsor Ltd is considering a project, which will involve the following cash inflows and (out)flows:

Year	0	1	2	3
Cash flow	-400,000	40,000	300,000	300,000

If the cost of borrowing is 15% per annum what is the net present value of the project?

Guide:

The NPV = PV (Inflows) PV (Outflows or Cost)

We accept deals where the NPV > 0, and

We reject deals where the NPV < 0.

NPV=-IO+1nCFt(1+K)t

NPV = NET PRESENT VALUE

IO = INITIAL OUTLAY

K= COST OF CAPITAL or requirement rate of return

N= number of years