Question

You are making an investment of $110,000 and require a rate of return of 14.6 percent. You expect to receive $48,000 in the first year, $52,500 in the second year, and $55,000 in the third year. There will be a cash outflow of $900 in the fourth year to close out the investment. What is the net present value of this investment?

Answer 1

Answer:

7881 approx

Explanation:

YEAR      CASH FLOW    PV FACTOR @14.6%      PRESENT VALUE

0              (110,000)                   1                                 (110,000)

1              48,000                      0.8726                            41,885                        

2              52,500                      0.7614                            39,975

3              55000                       0.6644                            36,543

4                (900)                       0.5798                               (522)

                     Net Present Value                                 +7881 approx  

Note: The figures in brackets indicate cash outflow

Net Present value (NPV) refers to the excess of present value of cash inflows over present value of cash outflows.

Net Present Value is used as a tool for decision making. A project under consideration should be accepted if it's NPV is either zero or positive.