|Assume that the cost of investing is N$7 000 000 and will result in cash flows of N$ 6 500 000 in year 1 and N$4 200 000 in year 2. The firm's cost of capital is 20%. Find the net present value

To calculate the Net Present Value (NPV) of an investment, we use the formula:

\[
\text{NPV} = \sum \frac{C_t}{(1 + r)^t} - C_0
\]

Where:
- $ C_t $ = Cash flow in year $ t $
- $ r $ = Discount rate (cost of capital, 20% in this case)
- $ C_0 $ = Initial investment cost (N$7,000,000)

Given:
- Cash flow in year 1 ($C_1$) = N$6,500,000
- Cash flow in year 2 ($C_2$) = N$4,200,000
- Discount rate $r$ = 20% = 0.20
- Initial investment ($C_0$) = N$7,000,000

We will now calculate the present value of each cash flow and subtract the initial investment to find the NPV.

\[
\text{NPV} = \frac{6,500,000}{(1 + 0.20)^1} + \frac{4,200,000}{(1 + 0.20)^2} - 7,000,000
\]

Let me calculate this for you.The Net Present Value (NPV) of the investment is N$1,333,333.33.

This means that the investment is expected to add approximately N$1,333,333.33 in value after accounting for the cost of capital.

Would you like more details or have any questions?

Here are 5 related questions to deepen your understanding:
1. What is the significance of a positive NPV in investment decisions?
2. How does changing the discount rate affect the NPV?
3. What would happen to the NPV if the cash flows were delayed by an additional year?
4. How can NPV be compared with other investment evaluation methods like IRR?
5. How does the assumption of constant cash flows affect NPV analysis?

**Tip:** Always compare the NPV with 0. If NPV is greater than 0, the investment adds value.

Assume that the cost of investing is N$7 000 000 and will result in cash flows of N$ 6 500 000 in year 1 and N$4 200 000 in year 2. The firm's cost of capital is 20%. Find the net present value.

Learn how to calculate the Net Present Value (NPV) of an investment with a N$7,000,000 initial cost, cash flows of N$6,500,000 in Year 1 and N$4,200,000 in Year 2, and a 20% discount rate. This solution provides a detailed step-by-step guide using the NPV formula and time value of money principles. Ideal for finance students and professionals.

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