Question

1. A project will produce cash inflows of $2,800 a year for 4 years with a final cash inflow of $5,700 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent

Answer 1

$1,048.75

Step-by-step explanation:

Data provided in the question:

Cash flows for the 4 years = $2,800 each year

Cash flow for the year 5 = $5,700

Project's initial cost = $9,500

Required rate of return = 16 percent

Now,

Present value of the cash flow = Cash flow × Present value factor

also,

Present value factor = [ 1 + r]⁻ⁿ

n is the year

Thus,

Year Cash Flow Present value factor Present Value of Cash flow

1 2,800.00 0.86 2,413.79

2 2,800.00 0.74 2,080.86

3 2,800.00 0.64 1,793.84

4 2,800.00 0.55 1,546.42

5 5,700.00 0.48 2,713.84

Total value of cash flow = ∑ Present value of cash flow

= $10,548.75

Therefore,

Net Present Value

= Present Value of Cash inflow - Initial investment

= $10,548.75 -$9500

= $1,048.75