Question

Below is a table for the present value of $1 at Compound interest.

Year	6%	10%	12%
1	0.943	0.909	0.893
2	0.890	0.826	0.797
3	0.840	0.751	0.712
4	0.792	0.683	0.636
5	0.747	0.621	0.567

Below is a table for the present value of an annuity of $1 at compound interest.

Year	6%	10%	12%
1	0.943	0.909	0.893
2	1.833	1.736	1.690
3	2.673	2.487	2.402
4	3.465	3.170	3.037
5	4.212	3.791	3.605

Using the tables above, if an investment is made now for $18,150 that will generate a cash inflow of $6,050 a year for the next 4 years, what would be the net present value (rounded to the nearest dollar) of the investment, assuming an earnings rate of 10%?

      $18,150

$1,029

$6,050

$19,179

Answer 1

NPV is the difference of present value of future cash inflows in aggregate and the initial investment.

NPV = Present value of future cash flows – Initial investment

         = ($6,050 × factor of 10% on 4^th year in annuity table) - $18,150

         = ($6,050 × 3.170) - $18,150

         = $19,178.50 - $18,150

         = $1,028.5

         = $1,029 (Rounded)

Answer: 2^nd option