Question

Gamma Corporation is considering an investment of $516,000 in a land development project. The investment will...

Gamma Corporation is considering an investment of $516,000 in a land development project. The investment will yield cash inflows of $200,000 per year for five years. The company uses a discount rate of 9%. What is the net present value of theinvestment? a $237,360 b $340,560 c $200,000 d $262,000

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Answer #1

net present value = Present value of cash inflows - Present value of cash outflows

= [200000*1/(1.09)^1+200000*1/(1.09)^2+200000*1/(1.09)^3+200000*1/(1.09)^4+200000*1/(1.09)^5]-516000

= $ 778000-516000

= $ 262,000

Answer = $ 262,000

Note:

Year Cash Flow Discounting Factor (9%) Present Value (Discounting Factor* cash Flow)
1 2,00,000 0.92 1,84,000.00
2 2,00,000 0.84 1,68,000.00
3 2,00,000 0.77 1,54,000.00
4 2,00,000 0.71 1,42,000.00
5 2,00,000 0.65 1,30,000.00
7,78,000.00
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