Question

"If $80000 is invested in a certain business at the start of the year, the investor...

"If $80000 is invested in a certain business at the start of the year, the investor will receive $30000 at the end of each of the next 3 years. What is the present value of this business opportunity if the interest rate is 2.5% per year?

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Homework Answers

Answer #1

Solution :

Cash outflow at year 0 = $80000

Cash Inflow at end of each of 3 years = $30000

Present value of cash inflows = Cash Inflow / (1 + r/100)^n

where, r= rate of interest

n= number of year

Year 1 = 30000/(1+.025)^1= $29268.29

Year 2 = 30000/(1+.025)^2= $28554.43

Year 3 = 30000/(1+.025)^3= $27857.98

Total Present Value of Cash Inflows = $29268.29 + $28554.43 + $27857.98 = $85680.7

Net Present Value = Present Value of Cash Inflows - Present Value of Cash Outflows

= $85680.7 - $80000 = $5680.7

Thank You.

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