Question

A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is _________.

A) $1,000
B) $0
C) $1.25
D) -$1,000

Answer 1

The net present value of the investment is calculated by subtracting the $5,000 initial investment from the $4,000 present value of the cash flows, resulting in a NPV of -$1,000.

Step-by-step explanation:

The net present value (NPV) of an investment is calculated by subtracting the initial investment from the present value of cash flows. In this case, the initial investment is $5,000, and the presently valued cash flows are $4,000. Therefore, the NPV is obtained by subtracting the initial investment from the present value of the cash flows, which is $4,000 - $5,000, resulting in a NPV of -$1,000. Hence, the correct answer is D) -$1,000.