Question

1. An investment of $83 generates after-tax cash flows of $50.00 in Year 1, $74.00 in Year 2, and $135.00 in Year 3. The required rate of return is 20 percent. What is the net present value?

Answer 1

Present value factor

= 1 / (1 + r) ^ n

Where,

r = Rate of interest = 20% or 0.20

n = Years = 0 to 3

P V factor for year 1

= 1 / 1.20

= 0.8333

= So, P V Factor for year 2

= 1 / (1.20 ^ 2)

= 1 / 1.44

= 0.6944

PV factor for year 3

= 1 / (1.20 ^ 3)

=1 / 1.728

= 0.5787

So, present value of inflows

= Sum of Respective inflows x P V factors

= $50 x 0.8333 + $74 x 0.6944 + $135 x 0.5787

= $41.66 + $51.39 + $78.12

= $171.17

So, net present value

= Present value of inflows - Initial investment

= $171.17 - $83

= $88.17