Given the projected revenue flow of a project for 5 years, use NPV to estimate if it is viable.Year 0 :(30000) Year 1: 11000 Year 2: 11000 Year 3: 11000 Year 4: 11000 Year 5: 11000

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justaguide | College Teacher | (Level 2) Distinguished Educator

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If the viability of a project has to be estimated using the net present value or NPV of the future cash flows, there has to be a discounting factor. The discounting factor is the cost of borrowing funds that are used for the project, this can either be the rate of interest that is applicable for the funds borrowed or the opportunity cost of not using the funds for some other purpose.

The revenue flow for the project is:

Year 0 :(30000)

Year 1: 11000

Year 2: 11000

Year 3: 11000

Year 4: 11000

Year 5: 11000

There is a revenue outflow of 30000 initially followed by revenue inflows for the next five years. Let the discounting factor be r. The NPV of the project is:

-30000 + 11000/(1+r) + 11000/(1+r)^2 + 11000/(1+r)^3 + 11000/(1+r)^4 + 11000/(1+r)^5

=> -30000 + 11000((1 - (1/(1+r))^6))/(1 - 1/(1+r))

=> -30000 + 11000((1+r)(1 - (1/(1+r))^6))/r

If 11000((1+r)(1 - (1/(1+r))^6))/r is greater than 30000, the project is viable. This is dependent entirely on the discounting factor.

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