Question

Seattle Corporation identifies an investment opportunity that will yield end of year cash flows of $30,000 in both Year 1 and Year 2, $35,000 in both Year 3 and Year 4, and $40,000 in Year 5. The investment will cost the firm $85,000 today, and the firm's required rate of return is 10 percent. What is the net present value (NPV) for this investment?

Answer 1

Sol :

Given,

Present value of outflows (PVO) = $85,000

Rate of return (r) = 10%

Cash flow years = $30,000 in1st and 2nd year, $35,000 in 3rd and 4th year and $40,000 in 5th year.

To determine net present value (NPV) for this investment as follows,

Present value of inflows (PVI)= Cash flows x present value factor

Present value of inflows (PVI) = (30000 / 1.1) + (30000 / 1.1)^2 + (35000 / 1.1)^3 + (35000 / 1.1)^4 + (40000 / 1.1)^5

Present value of inflows (PVI) = $127,104.46

NPV = Present value of inflows (PVI) - Present value of outflows (PVO)

NPV = $127,104.46 - $85,000 = $42,104.46

Therefore net present value (NPV) for this investment will be $42,104.46