1.19 Net Present Value (NPV): Annuity Cash Inflows
Example #3: Annuity Cash Flows: This is a simple example – due to the cash flows’ being an annuity, we do not have to use a spreadsheet table in order to discount each individual cash inflow one-by-one.
Given:
- Initial outlay = $2,532
- Free Cash inflow (EBT) = $1,000 per year for 5 years
- Salvage value = $0
- k = 10%
Solution: NPV = PV of inflows less initial outlay
= (PVannuity for 5yrs @ 10% for $1,000) – ($2,532)
= $3,790.8 – 2,532
= $1,258.80
We will be using “Example #3” repeatedly for the next twenty pages or so, so store the “givens”!!!
You should verify the solution above (i.e., check it out on your own!)
If the salvage value had exceeded zero, we would have had another cash flow (for the salvage value), which would be received at the horizon. The asset would be sold at that time for its salvage value.