00:02
Create the net present value to calculate it present value of the project.
00:29
But this we need to determine the present value of cash flows associated with the project taking into account the initial investment and with cash flows salvage value and the discounted rate the npv formula is npv equals to initial investment plus pbo annual cash flow as pv of salvage value first calculate the present value of annual cash flow.
01:27
The annual cash flows are the difference between forecasted revenues and the cash expenses.
01:33
We'll calculate the pv of each cash flows over the projects 10 -year period using the discount rate of 12 % so first is to calculate pv that is the present value of annual cash.
01:56
If your manual cash flow equals to revenue minus expenses divided by 1 plus discount rate.
02:27
So what we had the t represents the year that is 1 to 10 year 1 or year 1 equals to year 1 pv's cash flow equals to $30 ,000.
02:57
I know $29 ,000 divided by 1 plus 0 .12.
03:13
So for year 2 to 10 pv of the cash flow is equals to $32 ,000 minus $29 ,000.
03:28
Divided by 1 plus 0 .12 plus $32 ,000 minus $29 ,000 divided by 1 plus 0 .12 like this for years up to 10 years follow 32 ,000 minus $29 ,000 divided by 1 plus 0 .12 10 years.
04:23
So now calculating the present value of or salvage value and delete the present value or and which which is equals to the salvage value of the equipment at the end of the project is $9 ,000...