Question states if a project costs 1.5mil pounds and is expected to bring in a net cashflow of 500,000 pound for each of the next 4 yrars. If the discount rate is 10%, is the project worth doing? Solution attemps to compute NPV of the project as follows -1,500 + 500/(1.1) + 500/(1.1^2) + ... + 500/(1.1^4) = +84.95 But isnt this calculated using an interest rate of 10% when the question says the discount rate is 10%, meaning i = (1/0.9) - 1 = 11.11% So the NPV of the project should actually be computed as -1,500 + 500a_4 @11.11% = 47,550 pound. It's still positive but this isn't listed as a mistake on the corrections page and no one has brought it up in this forum so i'm starting to wonder if im going crazy!
I believe discount rate is another term for interest rate. Discount rate is not the same as rate of discount. d = Rate of Discount
I see. That seems rather technical, i've never come across that term before. I Can't understand why the question would specify a discount rate, why can't they just say Interest rate to avoid any confusion. Thank you for your reply.
