Final answer:
To calculate the net present value of an investment, each future cash flow is discounted to its present value using the required rate of return, and then summed up before subtracting the initial investment cost.
Step-by-step explanation:
The student asked how to compute the net present value (NPV) of an investment considering a series of net cash flows and a required return rate. The NPV calculation is used to assess the profitability of an investment. It involves discounting future cash flows to their present value using the required rate of return, in this case, 10%, and then subtracting the initial investment. Since each cash flow occurs at a different time period, each one must be discounted separately to the present value before adding them up to get the final NPV.
Example: If the company had net cash flows of $10,000, $25,000, $50,000, $37,500, and $100,000 over five years, the present value of each amount would be calculated using the formula Present Value = Future Value / (1 + r)^n, where r is the discount rate (10% in this case), and n is the number of periods until the cash flow occurs. These calculated values are summed and then the initial investment is subtracted to obtain the NPV. This method can help the company decide whether the investment meets their financial goals.