Question

Park Co. is considering an investment that requires immediate payment of $32,920 and provides expected cash inflows of $9,500 annually for four years. Park Co. requires a 5% return on its investments.

1-a. What is the net present value of this investment? (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round your present value factor to 4 decimals.)

Answer 1

Year Cashflow DF@5% PV

$ $

0 (32,920) 1 (32,920)

1 9,500 0.9523 9,047

2 9,500 0.9070 8,617

3 9,500 0.8638 8,206

4 9,500 0.8227 7, 816

NPV 766

The investment should be undertaken because it has a positive net present value of $766.

Step-by-step explanation:

The initial outlay is the cashflow for year 0 while the expected cash inflows are the cashflows for year 1 to 4. The discount factor for year 0 is 1 while the discount factors for year 1 to 4 will be obtained at 5% from the table provided. The present values of expected cash inflows are products of expected cash inflows and probability. Net present value is the difference between present value of expected cash inflows and initial outlay.