Odeletta Corporation is considering an investment of $518,000 in a land development project. The investment will yield cash inflows of $220,000 per year for five years. The company uses a discount rate of 9%.
What is the net present value of the investment?

Present value of an ordinary annuity of $1:8%9%10%10.9260.9170.90921.7831.7591.73632.5772.5312.48743.3123.243.1753.9933.893.791

A. $341,88

B. $238,280

C. $220,00

D. $337,800

Net Present Value (NPV) : This is one of the techniques available to evaluate the feasibility of an investment project. The NPV of a project is the difference between the present value of the cash inflows and the cash outflows of the project. NPV is superior to other techniques for the reasons below:

It considers the time value of money i.e it uses present values.
It uses relevant cash flows rather than profit figures
it is consistent with the shareholders' wealth maximization principle.

The Present Value (PV)of a future cash flow is the amount that needs to be invested today at a particular rate of return to equal the same cash flow in the future. Present value means the value in year 0 or now

Some times, the cash inflows from a project could be an equal amount occurring periodically, this is called an annuity. An annuity is a series of equal annual payments or receipts made for a certain number of years. Tom calculate the PV of annuity we use this formula:

PV = A × (1 - ((1+r)^(-n))/n)

where- PV- Present value, A- annual cash flow, n- number of years

In this question, the cash inflow is a five-year annuity.

We now calculate the NPV;

Net Present Value (NPV) = PV of cash inflows - Initial cost

Remember that the inflow is an annuity, so we first calculate the PV of the annuity using this formula and then subtarct from the initial cost:

PV = A × (1 - ((1+r)^(-n))/n)

PV of annuity inflow = 220,000 × ((1-(1 +0.09)^(-5))/0.09)

220,000 × 3.890

= 855,800

NPV = 855,800 - 518,000

= 337,800

What is the net present value (NPV) of the investment= $337,800