Question

A company is expanding its operations. It costs $10,000 today to invest in a software upgrade to expand sales, and it produces the following incremental cash flows over time: negative $500 at the end of Year 1; $7,000 at the end of Year 2; $0 at the end of Year 3, $9,000 at time 4, and $450 at time 5. Using interest rate of 4%, answer the questions:

a. What is the present value of the cash flow stream?

b. What is the future value of the cash flow stream?

If you are using NPV function in Excel, please remember that it does not count Cash Flow 0, which you have to add to the result separately. In our case CFo is a cost, so use -10,000 (negative CFo).

Answer 1

The initial cost for year one is -10,000 subsequent to which the cash flow have been mentioned from year 1-5. The present value is calculated by the Time value of money formula where PV = FV/(1+r)^n , r= 0.04, n = 1 to 4 , FV = cash flow for each period

The formula is entered in the excel table has shown above

The cumulative PV's are calculate and then after deducting the initial investment the NPV is calculated.

The present value of the cash flow is 4054

The FV = PV * (1+r)^n where PV = 4054, r= 0.04, n = 5  

FV = 4932.59

answered by: anonymous