Question

A firm is reviewing an investment opportunity that requires an initial cash outlay of $336,875 and promises to return the following irregular payments: Year 1: $100,000 Year 2: $82,000 Year 3: $76,000 Year 4: $111,000 Year 5: $142,000 If the required rate of return for the firm is 8%, what is the net present value of the investment? (You'll need to use your financial calculator.)

Answer 1

The NPV of this investment is $64,581.75

Step-by-step explanation:

Hi, we need to discount to present value all the future cash flows, the formula to use is as follows:

`NPV=-Investment+(CF1)/((1+r)^(1) )+(CF2)/((1+r)^(2)) +(CF3)/((1+r)^(3)) +(CF4)/((1+r)^(4)) +(CF5)/((1+r)^(5))`

Where

NPV = Net Present Value

CF = The cash flow stated in the problem by year

r= discount rate (in our case, 0.08 or 8%)

Now, let´s solve this.

`NPV=-336,875+(100,000)/((1+0.08)^(1) )+(82,000)/((1+0.08)^(2)) +(76,000)/((1+0.08)^(3)) +(111,000)/((1+0.08)^(4)) +(142,000)/((1+0.08)^(5))`

`NPV=-336,875+ 92,592.59 + 70,301.78 + 60,331.25 + 81,588.31+96,642.81`

`NPV=64,581.75`

So, the net present value of this project is $64,581.75

Best of luck.