Question

17. A $130,000 investment in new equipment this year will increase your firm's profits by $50,000 in each of the next 3 years. What is approximately the net present value of this investment if your firm's opportunity cost of capital is 10 percent?

A) -5,657
B) 5,657
C) 124,343
D) 128,850

Answer 1

Ans:

Option A

net present value of this investment = -5,657

a) Increase in cash flow for the next 3 years are as follows

Year-1 = $50,000

Year-2 = $50,000

Year-3 = $50,000

b) calculation of net present value(NPV)

Net Present Value(NPV) = Cash flow * Discounting Factor

Discounting factor = 1/(1+i)^n

Net present value = -$130,000 * 1/(1+0.10)^0 + $50,000 * 1/(1+0.10)^1 + $50,000 * 1/(1+0.10)^2 + $50,000 * 1/(1+0.10)^3

Net Present Value = -$130,000 * 1 + $50,000 * 0.9091 + $50,000 * 0.8264 + $50,000 * 0.7513

= -$130,000 + $4545 + $41320 + $37565

= -$5660(Approx)