Question

Ivanhoe Telecommunications Corp. has made an investment in another company that will guarantee it a cash flow of $20,500 each year for the next five years. If the company uses a discount rate of 13 percent on its investments, what is the present value of this investment?

Answer 1

annual cashflows for the next 5 years=$20,500

discount rate=13%

The present value of the investment=(20,500/(1+13%))+(20,500/(1+13%)^2)+(20,500/(1+13%)^3)+(20,500/(1+13%)^4)+(20,500/(1+13%)^5)

=18,141.59+16,054.51+14,207.53+12,573.03+11,126.58

The present value of the investment=$72,103.24

We can also do this in the EXCEL with NPV function

=NPV(rate, Year1 to Year5 cashflows)

=NPV(13%, Year1 to Year5 cashflows)

NPV=$72,103.24