Question

Three people are starting a communications service business. They expect to have net operating losses of $120,000 per year for the first two years, followed by net operating profits of $240,000 per year for the next eight years. The minimum attractive rate of return is 18%. The net present worth of the expected cash flow is most nearly

Answer 1

Answer:

• The net present worth of the expected cash flow is most nearly

$514,950  

Explanation:

To find the Net Present Worth of the cash flow it's necessary to applied the Present Value formula which indicates:

Present Value  =  CF /  (1 + r)^t

CF: Each Cash Flow

r : Rate of Return

t : Each moment when the Cash Flow are received.

 

Total Present Value :  -101.695 - 86.182 + 146.071 + 123.789 +   104.906 + 88.904 + 75.342 + 63.849 + 54.109 + 45.855   = $514.950

Period:                    Year 1              Year 2

Net Operating       -$120,000  -$120,000  

Rate:                        (1+0,18)^1          (1+0,18)^2

Net Present Value -$101,695  -$86,182  

Period:                    Year 3              Year 4

Net Operating       $240,000  $240,000  

Rate:                        (1+0,18)^3          (1+0,18)^4

Net Present Value $146,071    $123,789  

Period:                    Year 5              Year 6

Net Operating       $240,000  $240,000  

Rate:                        (1+0,18)^5          (1+0,18)^6

Net Present Value $104,096  $88,904  

Period:                    Year 7              Year 8

Net Operating      $240,000  $240,000  

Rate:                        (1+0,18)^7          (1+0,18)^8

Net Present Value $75,342   $63,849  

Period:                    Year 9              Year 10

Net Operating       $240,000  $240,000  

Rate:                        (1+0,18)^9          (1+0,18)^10

Net Present Value $54,109    $45,855