Question

g Gustavo is considering an investment proposal that requires an initial investment of $91,100, has predicted cash inflows of $30,000 per year for four years, and no residual value. At a discount rate of 10 percent, the project’s net present value is: (use the tables provided in these notes; round all calculations to the nearest dollar)

Answer 1

The NPV is $3996

Step-by-step explanation:

Net Present Value (NPV) is a tool in capital budgeting to analyze the prject proposals. It is the value of the project adds in today's terms based on the difference between the present value of cash inflows from the project less the present value of cash outflows and initial investment.

Thus, NPV is:

NPV = CF1 / (1+d) + CF2 / (1+d)^2 + ... + CFn / (1+d)^n - Initial Cost

Where d is the discount rate.

As the cash inflows from the project are constant and are after equal intervals of time and for a defined time period, they can be treated as an annuity. Thus, NPV in this case will be,

NPV = Present value of annuity - Initial investment

NPV = 30000 * [ (1 - (1+0.1)^-4) / 0.1 ] - 91100

NPV = $3995.96 rounded off to $3996

The formula for present value of ordinary annuity is attached