Based on what I have read in this week’s chapter I would have to say Net Present Value is something we use at my job. My company decided to analyze the predicted profitability of one of its projects. In order to do so it had an initial cost of $10,000. Within 3 years the project had a projecting revenue of $2,000, $7,000 and $11,000, respectively. The anticipated discount rate was 4.5%. When we first looked at our profits at face value we first thought the company’s returns were double the investment. However, this was not the case. Within the 3 years a dollar earned did not have the same value as a dollar earned in today’s economy. Therefore, we had to calculate the NPV in order to figure out the profitability to include figuring out what was the discounted time value of the projected revenues. In order to figure it out I had to do the below calculation:
NPV = {$2,000/ (1+.045) ^1} + {$7,000/ (1+.045) ^2} + {$11,000/ (1+.045) ^3} - $10,000
= $1,913.88 + $6,410.11 + $9,639.26 - $10,000
= $7,963.25
Based on my calculations, how would I interpret the results of my above project? Also what would be my risks if I missed my predictions?