Question

Three people are starting a communications service business. They expect to have net operating losses of $120,000 per year for the first two years, followed by net operating profits of $240,000 per year for the next eight years. The minimum attractive rate of return is 18%. The net present worth of the expected cash flow is most nearly

Answer 1

• The net present worth of the expected cash flow is most nearly

$514,950

Step-by-step explanation:

To find the Net Present Worth of the cash flow it's necessary to applied the Present Value formula which indicates:

Present Value = CF / (1 + r)^t

CF: Each Cash Flow

r : Rate of Return

t : Each moment when the Cash Flow are received.

Total Present Value : -101.695 - 86.182 + 146.071 + 123.789 + 104.906 + 88.904 + 75.342 + 63.849 + 54.109 + 45.855 = $514.950

Period: Year 1 Year 2

Net Operating -$120,000 -$120,000

Rate: (1+0,18)^1 (1+0,18)^2

Net Present Value -$101,695 -$86,182

Period: Year 3 Year 4

Net Operating $240,000 $240,000

Rate: (1+0,18)^3 (1+0,18)^4

Net Present Value $146,071 $123,789

Period: Year 5 Year 6

Net Operating $240,000 $240,000

Rate: (1+0,18)^5 (1+0,18)^6

Net Present Value $104,096 $88,904

Period: Year 7 Year 8

Net Operating $240,000 $240,000

Rate: (1+0,18)^7 (1+0,18)^8

Net Present Value $75,342 $63,849

Period: Year 9 Year 10

Net Operating $240,000 $240,000

Rate: (1+0,18)^9 (1+0,18)^10

Net Present Value $54,109 $45,855