Answer to Question #200247 in Economics for Junaid Ahmed

Question

In Problem 6, suppose that 6 percent inflation in cost savings from labor is expected over

the last four years, so that savings in the first year are $20,000, savings in the second year

are $21,200, and so forth.

a. If the required rate of return is still 15 percent, what is the net present value of the

project? Is it acceptable?

b. If a working capital requirement of $10,000 were required in addition to the cost of

the equipment and this additional investment were needed over the life of the project,

what would be the effect on net present value? (All other things are the same as in

Problem 7, Part (a).

Answer 1

Net present value (NPV) is a key criterion that allows you to decide whether it is wise to invest in a project. Typically used in the financial sector. Regardless of the purpose of the application, it is important to understand how to calculate the indicator and what problems may arise during the work.

The indicator allows you to evaluate the effectiveness of the organization from an economic point of view and compare the objects of investment activity, which will help to make a decision, as well as automate the enterprise management processes.