Question

Odeletta Corporation is considering an investment of $ 506 comma 000 in a land development project. The investment will yield cash inflows of $ 212 comma 000 per year for five years. The company uses a discount rate of​ 9%. What is the net present value of the​ investment? Present value of an ordinary annuity of​ $1: ​8% ​9% ​10% 1 0.926 0.917 0.909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 4 3.312 3.24 3.17 5 3.993 3.89 3.791

Answer 1

$318,680

Step-by-step explanation:

initial investment ($506,000)

cash flow year 1 = $212,000

cash flow year 2 = $212,000

cash flow year 3 = $212,000

cash flow year 4 = $212,000

cash flow year 5 = $212,000

discount rate 9%

present value of an ordinary annuity for 5 years and 9% discount rate = 3.89

the net present value = (yearly cash flow x annuity value) - initial investment = ($212,000 x 3.89) -$506,000 = $824,680 - $506,000 = $318,680

The net present value of an investment equals the difference between the present value of the cash flows generated by the investment minus the initial cost of the investment.