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