9609 · 10.3.3

Discounted cash flow method: net present value (NPV) — practice questions

Practice and worked examples for 9609 Discounted cash flow method: net present value (NPV). Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Project costs $100 000 now. Net cash flows: Year 1 $40 000, Year 2 $45 000, Year 3 $50 000. Cost of capital 10%.

Discount factors: Y1 0.909, Y2 0.826, Y3 0.751.

Calculate NPV and advise.

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Year	Net CF	DF @ 10%	PV
0	(100 000)	1.000	(100 000)
---	---	---	---
1	40 000	0.909	36 360
2	45 000	0.826	37 170
3	50 000	0.751	37 550

Sum of PV inflows = 36 360 + 37 170 + 37 550 = 111 080

NPV = 111 080 − 100 000 = **+ $11 080**$

Accept — positive NPV means the project exceeds the 10% required return and adds value.

Worked example 2

Project X NPV = +$8 000. Project Y NPV = +$12 000. Only one can be chosen (mutually exclusive). Which should the firm select?

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Both have positive NPV, but only one can proceed.

Choose Project Y — higher NPV ($12 000) adds more shareholder value at the same cost of capital.

Note: if Y requires scarce management or strategic conflict, mention qualitative override in a full recommend answer (10.3.4).

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