Question

Compute the net present value of an investment with 5 years of annual cash inflows of $100 and two cash outflows, one today of $100 and one at the beginning of the second year of $50. Use a discount rate of 10 percent.a.$229.08b.$287.60c.$233.62d.$271.53

Answer 1

c.$233.62

Step-by-step explanation:

The computation of the net present value is presented below:

Net present value = Present value of cash inflows - present value of cash outflows

where,

Present value of cash inflows

= Annual payment × PVIFA for 5 years at 10%

= $100 × 3.7908

= $379.08

Refer to the PVIFA table

And, the present value of cash outflows would be

= One year amount + Second year amount × discount factor

= $100 + $50 × 0.9091

= $100 + 45.455

= $145.455

The discount factor is calculated below:

= 1 ÷ (1 + rate) ^ years