Question

Consider the cash flows in selections 1 through 4. In each case, the first cash flow occurs at the end of the first period, the second cash flow at the end of the second period, and so on. Which of the following selections has the lowest PRESENT VALUE if the discount rate is 10%?1. $100; $100; $100; $1002. $0; $0; $0; $5003. $350; $0; $0; $04. $50; $50; $50; $375

Answer 1

Selection 1 has lowest NPV = $316.9

Step-by-step explanation:

Rate of discount is 10% therefore PV factor for every year =
`\frac{1}{(1+0.1){^n}}`

Here 0.1 because interest rate is 10% n = number of year for year 1 = 1 for year 2 = 2 and so on.

Selection 1

Year Cash Flow PV Factor Value

1 $100 0.909 $90.9

2 $100 0.826 $82.6

3 $100 0.751 $75.1

4 $100 0.683 $68.3

Net Present Value = $316.9

Selection 2

In this only in 4th year the payment is received = $500 X 0.683 PV Factor

= $341.5

Selection 3

Only in year 1 $350 is received = $350 X 0.909 = $318.15

Selection 4

Year Cash Flow PV Factor Value

1 $50 0.909 $45.45

2 $50 0.826 $41.3

3 $50 0.751 $37.55

4 $375 0.683 $256.125

Net Present Value = $380.425

Selection 1 has lowest NPV = $316.9