Calculating Net Present Values

Calculating Net Present Values
You want to calculate the Net Present Value of an investment in real
estate. You are able to purchase a property for €1 Million. You have
to invest €120,000 p.a. during the first two years. After two years the
building is complete and will be worth €1,500,000.
All this yields a new set of cash-flow forecasts:
Period t = 0, t = 1, t = 2
Property -1.000.000
Invest -120.000, -120.000
Payoff +1.500.000
Total C0 = 1.000.000 C1 = -120.000 C2 = +1.380.000
If the interest rate is 7 %, then NPV is:
NPV = C0 + C1 / (1+ r) + C2 / (1 + r)² = -1,000,000 – 120,000 / 1.07
+ 1,380,000 / (1.07)² = € 93,195.91
Since the Net Present Value is positive, you should still go ahead. The
investment is profitable, but be careful if the forecast is risky or the
opportunity cost of capital could increase. The NPV at r = 12 % is
negative, the project should be rejected.

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