Asked by Francielle Viana on Jul 17, 2024
Verified
The net present value is closest to?
A) $20,400.
B) $80,000.
C) $50,000.
D) $28,400.
Discount Rate
The interest rate used to discount future cash flows to their present value, often used in investment valuation and project evaluation.
Annual Net Cash Inflows
The total amount of cash received minus cash expenses over a year.
Net Present Value
The discrepancy in the present valuation of incoming and outgoing cash flows within a certain timeframe.
- Master the application of the net present value (NPV) concept in investment decision-making.
Verified Answer
GC
Gavin CagleJul 23, 2024
Final Answer :
A
Explanation :
The net present value (NPV) is calculated by discounting the future cash inflows to their present value and subtracting the initial investment. Using the given discount rate of 10% and the cash inflows for each year, the NPV calculation is as follows:- Year 1: $60,000 / (1 + 0.10)^1 = $54,545.45- Year 2: $30,000 / (1 + 0.10)^2 = $24,793.39- Year 3: $20,000 / (1 + 0.10)^3 = $15,026.16- Year 4: $20,000 / (1 + 0.10)^4 = $13,660.15- Year 5: $20,000 / (1 + 0.10)^5 = $12,418.32Adding these values gives a total present value of cash inflows of $120,443.47. Subtracting the initial investment of $100,000 gives an NPV of approximately $20,443.47, which is closest to $20,400.
Learning Objectives
- Master the application of the net present value (NPV) concept in investment decision-making.