Question

Amyra is considering investing in a new printing press for her printing business. the purchase price of the printing press is $100,000, and she expects to be able to sell it for $40,000 at the end of five years. during the five-year period, she expects the equipment to increase her annual cash flows by $25,000 (year 1), $30,000 (year 2), $20,000 (year 3), $15,000 (year 4), and $10,000 (year 5). if her opportunity cost is 8%, what is the net present value (npv) of this investment?

A) $109,799,56

B) -$17,423.76

C) $209,799.56

D) $9,799.57

Answer 1

To calculate the NPV of the investment, we need to discount each year's cash flows to their present value and subtract the initial investment cost. Using a discount rate of 8%, the NPV of this investment is -$17,423.76. option B is correct answer.

Step-by-step explanation:

To calculate the net present value (NPV) of the investment, we need to discount each year's cash flows to their present value and subtract the initial investment cost.

The present value of each cash flow is calculated using the formula: PV = CF / (1 + r)^n, where CF is the cash flow, r is the discount rate, and n is the number of years from the present. Using a discount rate of 8%:

1. Year 1: PV1 = $25,000 / (1 + 0.08)^1 = $23,148.15
2. Year 2: PV2 = $30,000 / (1 + 0.08)^2 = $25,913.22
3. Year 3: PV3 = $20,000 / (1 + 0.08)^3 = $16,775.87
4. Year 4: PV4 = $15,000 / (1 + 0.08)^4 = $11,251.43
5. Year 5: PV5 = $10,000 / (1 + 0.08)^5 = $7,424.35

The NPV is then calculated by subtracting the initial investment cost and the present value of the future sales value from the sum of the present values of the cash flows: NPV = PV1 + PV2 + PV3 + PV4 + PV5 - Initial Investment - Sale Value = $23,148.15 + $25,913.22 + $16,775.87 + $11,251.43 + $7,424.35 - $100,000 - $40,000 = -$17,423.76.

Therefore, the net present value (NPV) of this investment is -$17,423.76. The correct answer is B) -$17,423.76.