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.