Question

A project requires a $34,000 initial investment and is expected to generate end-of-period annual cash inflows as follows:

Year 1: $ 15,500
Year 2: $ 16,500
Year 3: $ 15,500
Assuming a discount rate of 15%, what is the net present value (rounded to the nearest whole dollar) of this investment? Selected present value factors for a single sum are shown in the table below. i = 15% i = 15% i = 15% n = 1 n = 2 n = 3 0.8696 0.7561 0.6575 $(3,536) $(12,330) $2,146 $36,146 $0

Answer 1

The net present value (NPV) of the investment with an initial cost of $34,000 and annual cash inflows discounted at 15% comes out to be $2,146 when rounded to the nearest whole dollar.

Step-by-step explanation:

To calculate the net present value (NPV) of this investment, we must discount the future cash inflows at the given discount rate of 15%. Present value (PV) is calculated by multiplying the future cash inflow by the present value factor (PVF) for the respective year. We then sum up these discounted cash inflows and subtract the initial investment to find the NPV.

• Year 1: $15,500 × 0.8696 = $13,479
• Year 2: $16,500 × 0.7561 = $12,476
• Year 3: $15,500 × 0.6575 = $10,191

Adding up these amounts gives us a total PV of the cash inflows:

$13,479 + $12,476 + $10,191 = $36,146

Subtracting the initial investment from this total gives us:

$36,146 - $34,000 = $2,146

Therefore, the net present value of this investment, rounded to the nearest whole dollar, is $2,146.