Question

You are offered an investment opportunity that costs you $175,000, has an NPV of ($364.86), lasts for ten years,

has an interest rate of 10% and produces the following cash flow stream:

Year Cash Flow

0 ($175,000)

1 - 3 $10,000

4 - 6 $50,000

7 ?

8 - 10 $15,000

Required: Determine the value of the cash flow in year 7

Answer #1

Answer: | |||

Calculation of value of cash inflow in year 7, let x. | |||

Given: | |||

NPV = | Present value of cash inflows - Initial cost | ||

Initial cost = $175000 | |||

Year | Cash flows | Present value factor @10% | Present value |

1 | 10000 | 0.9091 | 9090.91 |

2 | 10000 | 0.8264 | 8264.46 |

3 | 10000 | 0.7513 | 7513.15 |

4 | 50000 | 0.6830 | 34150.67 |

5 | 50000 | 0.6209 | 31046.07 |

6 | 50000 | 0.5645 | 28223.70 |

7 | x | 0.5132 | 0.5132x |

8 | 15000 | 0.4665 | 6997.61 |

9 | 15000 | 0.4241 | 6361.46 |

10 | 15000 | 0.3855 | 5783.15 |

Total | 137431.18 + 0.5132x | ||

NPV = | ($137431.18 + 0.5132x) -$175,000 | ||

$364.86 = | -37568.82 + 0.5132x | ||

x | = (364.86 + 37,568.82) / 0.5132 | ||

= 37,933.68 / 0.5132 | |||

= 73,915.98 | (Answer) | ||

So, value of cash flow in year 7 is $73,915.98 |

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1
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