Question

You are trying to value the following investment opportunity: The investment will cost you $23,670 today. In exchange for your investment you will receive monthly cash payments of $5,050 for 9 months. The first payment will occur at the end of the first month. The applicable effective annual interest rate for this investment opportunity is 7%. Calculate the NPV of this investment opportunity. Round to two decimals (do not include the $-sign in your answer).

Answer 1

NPV = present value of cash inflows - present value of cash outflows.

here,

present value of cash inflows = $5050 for 9 months can be known using present value of annuity factor.

=> A*[1-(1+r)^(-n)]/r

here,

A=$5050.

r =7% *1/12 =>0.58333% =>0.0058333.

n=9 months

=>$5050*[1-(1.0058333)^(-9)]/0.0058333.

=>$5050*[1-0.94899935]/0.0058333.

=>5050*[0.05100065]/0.0058333

=>5050*8.74301853

=>$44,152.24.

present value of cash outflows =$23,670.

NPV = $44,152.24-23,670

=>20,482.24.