Assume that Goodrich Petroleum Corporation is evaluating a capital expenditure proposal that has the following predicted cash flows: Initial Investment …….. $(160,000)OperationYear 1 ……………… $ 42,000Year 2 ……………… $ 95,000Year 3 ……………… $ 65,000Salvage …………....... $ 0Using a discount rate of 10%, calculate the net present value of the investment proposal.

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SuchandraC SuchandraC · Answer 1 · 2022-12-20T10:02:39+01:00

Net present value of the investment proposal is $5,529.68 (Approx)

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Since, net present value is the difference between cash inflows and cash outflows, thus first we will calculate present value of inflows.

Present value of inflows = cash inflow × present value of discounting factor(rate% , time period)

= $42,000/1.1+ $95,000/1.1^2 + $65,000/1.1^3

=$1,65,529.68 (Approx)

We know, present value of outflows, thus net present value is

NPV = Present value of inflows - present value of outflows

=$1,65,529.68 - $1,60,000

=$5,529.68 (Approx)

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