Question

Susanne invests $8,000 now and again towards the end of year 3. She gets a following return for 6 years.

Year |
0 |
1 |
2 |
3 |
4 |
5 |
6 |

Cash Flow |
0 |
1,000 |
2,000 |
4,000 |
4,000 |
5,000 |
5,000 |

Assume Discount rate is 8%, answer the following:

What is the Net Present Value of these cash flows? Should
Susanne make invest in this opportunity?

What is the future value of Net Cash Flow (end of year 6)?

If Susanne had another opportunity where her NPV would be $2000.
What is her opportunity cost?

Answer #1

Discount rate | 8.000% | ||||||

Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |

Cash flow stream |
-8000 | 1000 | 2000 | -4000 | 4000 | 5000 | 5000 |

Discounting factor | 1.000 | 1.080 | 1.166 | 1.260 | 1.360 | 1.469 | 1.587 |

Discounted cash flows project | -8000.000 | 925.926 | 1714.678 | -3175.329 | 2940.119 | 3402.916 | 3150.848 |

NPV = Sum of discounted cash flows | |||||||

NPV Project = | 959.16 | ||||||

Where | |||||||

Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||||

Discounted Cashflow= | Cash flow stream/discounting factor |

FV of NPV

Future value = present value*(1+ rate)^time |

Future value = 959.16*(1+0.08)^6 |

Future value = 1522.07 |

opportunity cost is the NPV of the project = 2000

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