Question

You are considering an investment opportunity with the following costs and benefits. The applicable interest rate for this investment opportunity is 7.5% (effective annual rate). Calculate the NPV of this investment opportunity. Round your answer to two decimals (do not include the $-sign in your answer).

Investment Opportunity Cash Flows in $

Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |

Costs | $(14000) | $(10,000) | $(5,000) | $(1,000) | $(1,000) | $ - | $ - | $ - | $ - |

Benefits | $ - | $1,000 | $5,000 | $10,000 | $10,000 | $7,500 | $5,000 | $1,000 | $500 |

Answer #1

Here,

PVF = Present Value Factor

PV = Present Value

**NPV = Present value of cash inflow - Present value of
cash outflow.**

(amount in $)

Year |
Cash outflow
(a) |
Cash inflow
(b) |
Net cash flow (c)
[b-a] |
PVF
(d) |
PV of Cashflow
(c*d) |

0 | (14000) | 0 | (14000) | (1/1.075)^{0} =
1 |
(14000) |

1 | (10000) | 1000 | (9000) | (1/1.075)^{1} =
0.93 |
(8370) |

2 | (5000) | 5000 | 0 | (1/1.075)^{2} =
0.87 |
0 |

3 | (1000) | 10000 | 9000 | (1/1.075)^{3} =
0.80 |
7200 |

4 | (1000) | 10000 | 9000 | (1/1.075)^{4} =
0.75 |
6750 |

5 | 0 | 7500 | 7500 | (1/1.075)^{5} =
0.70 |
5250 |

6 | 0 | 5000 | 5000 | (1/1.075)^{6} =
0.65 |
3250 |

7 | 0 | 1000 | 1000 | (1/1.075)^{7} =
0.60 |
600 |

8 | 0 | 500 | 500 | (1/1.075)^{8} =
0.56 |
280 |

NPV |
960 |

Hence, the NPV of investment opportunity is $960, which they should accept it.

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0
1
2
3
4
5
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$ (1,000)
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$ (1,000)
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$10,000
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