Question

Wen Seng operates an ice cream shop. He is trying to decide whether to expand his business to include ice cream cakes. He will need some additional space that will cost him $7,200 per year at the end of each year and some additional equipment that will cost $10,000 up front. The ice cream cakes will provide an extra income of $10,000 per year at the end of each year. The business is expected to last 20 years. The discount rate (or interest rate) for Wen Seng's new business is 10%. What is the Net Present Value of the ice cream cake project project? (Assume there are no taxes.)

Answer 1

In finance, the net present value (NPV) or net present worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity.

$$NPV = \sum_{t=1}^{T} \frac{C_t}{(1+t)^t} - C_o$$

According to the results the project will be profitable and should be introduced.