Question

A new transmission in your truck will cost $9,500.00. luckily, it should reduce maintenance expense by $3,975.00 each year for the next 10 years. what is the npv of the transmission? use a discount rate of 10.70%

Answer 1

NPV stands for Net Present Value which is calculated through the equation,
                         NPV = C₀ + Ct/(1+r)^t
where C₀ is the original price, Ct is the amount saved, r is the discount rate and t is time. Calculating the NPV,
                         NPV = ($9,500) + ($3,975)/(1 + 0.1070)^10
                                  NPV = $10,938.34
Thus, the net present value is approximately $10,938.34. 

Answer 2

Answer:

$14,207

Explanation:

cash flows 1 - 10 = $3,975

discount rate = 10.7%

You can use an excel spreadsheet to calculate the PV of the future cash flows: =NPV(discount rate,series of cash flow) = NPV(10.7%,3975,3975...3975)

=$23,707.12

The excel function (NPV) calculates the present value of future cash flows, in order to determine the NPV of the investment (new transmission):

NPV = -initial investment + PV of future cash flows = -$9,500 + $23,707 = $14,207