Question

A company is evaluating an investment which has an initial investment of $15,000. Expected annual net cash flows over four years is $5,000. The company would like to earn a 10% return on the investment. The present value of an annuity factor for 10% and 4 periods is 3.1699. The present value of $1 factor for 10% and 4 periods is 0.6830. The net present value is (round your answer to the nearest whole dollar).

Answer 1

$850

Step-by-step explanation:

Data provided in the question:

Initial investment = $15,000

Expected annual net cash flows over four years, R = $5,000

Return on the investment = 10% = 0.10

Present value of an annuity factor for 10% and 4 periods, PVAF = 3.1699

The present value of $1 factor for 10% and 4 periods = 0.6830

Now,

Net present value = [ R × PVAF ] - Initial investment

= [ $5,000 × 3.1699 ] - $ 15,000

= $15,849.50 - $ 15000

= $849.50 ≈ $850