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✏️ Cisco is considering investing in HomeNet.

It has predicted the following cash flows if it makes the investment:

T	0	1	2	3	4	5
Cash Flows	-7500	3420	3420	3420	3420	600

In other words, if Cisco invests in HomeNet, it predicts that it will have an initial outlay of $7500,000, followed by four years in which it has a positive cash flow of $3,420. Finally, it will wrap the project up in the fifth year, with a final income of $600.

Should it invest in the HomeNet? The CFO has calculated that the appropriate discount rate to use is 6%.

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To calculate the NPV, you always do the following:

Step 1: PV Inflows:

PVInflows = $3420/(1+6%)^1 + $3420/(1+6%)^2 + $3420/(1+6%)^3 + $3420/(1+6%)^4 + $600/(1+6%)^5 = $12299.02

PVOutflows = 7500

NPV = $12299.02 - 7500 = $4799.02

Or, in one line:

NPV = PVInflows - PVOutflow = $3420/(1+6%)^1 + $3420/(1+6%)^2 + $3420/(1+6%)^3 + $3420/(1+6%)^4 + $600/(1+6%)^5 - $7500 = $4799.02

✏️ Can we do an NPV problem with 10 years and ugly numbers?

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See spreadsheet below.

More NPV Examples