Asked by Masaki Sakurai on Jul 02, 2024
Verified
If the cost of capital is 5% then the net present value of the investment is
A) $6,020.41
B) $7,380.95
C) -$7,380.95
D) $10,000
Net Present Value
A calculation used to assess the value of future cash flows in today's dollars, considering the time value of money.
Cost of Capital
The cost of funds used for financing a business, typically expressed as an annual percentage, including the cost of equity and debt.
Cash Flows
The total amount of money being transferred into and out of a business, indicating its financial health.
- Understand the concept of Net Present Value (NPV) and its application in investment decisions.
Verified Answer
KD
Kimberly Dickerson7 days ago
Final Answer :
A
Explanation :
The net present value (NPV) is calculated by discounting the future cash flows back to their present value and subtracting the initial investment. The cash flows in the first year ($25,000) and the second year ($30,000) are discounted back at the cost of capital (5%). The NPV calculation is as follows:Year 1: $25,000 / (1 + 0.05)^1 = $23,809.52Year 2: $30,000 / (1 + 0.05)^2 = $27,210.88Total NPV = $23,809.52 + $27,210.88 - $45,000 = $6,020.40 (rounded to $6,020.41 due to rounding in intermediate steps).
Learning Objectives
- Understand the concept of Net Present Value (NPV) and its application in investment decisions.