Question

An investment that costs $32,000 will produce annual cash flows of $10,680 for a period of 4 years. Given a desired rate of return of 8%, what will the investment generate? Use Appendix Table 2. (Do not round your intermediate calculations. Round your answer to the nearest whole dollar.)

A positive net present value of $35,374.

A positive net present value of $3,374.

A negative net present value of $3,374.

A negative net present value of $35,374.

Answer 1

Answer : A positive net present value of $ 3,374.

Explanation:

i) Intial investment $ 32,000

ii) cumulative present value of cash in flows :

Annual cash flow = $ 10,680

Discount factor = 8%

Cumulative discount factor for four years = 3.312

(0.926+0.857+0.794+0.735)

Cumulative present value of cash inflow = 10,680$* 3.312

= 35,372 $

Net present value = ( cumulative cash in flows - initial cost )

= ( ( A ) - ( B ) )

=. ( 35,372 - 32000 )

= 3,372 $ ( positive )

i.e ., 3,374 $ the difference is due to fractions considered.