Question

Smith Corporation is considering an investment that will cost $10,000 now and will produce cash inflows of $5,000 in year one, $5,000 in year two, and $2,000 in year three. Assuming a discount rate of 8%, what is the net present value of this investment?

A. $1,025
B. $504
C. $180
D. - $126

Answer 1

B. $504

Step-by-step explanation:

The computation of the net present value of this investment is shown below:

Year Cash flow PV factor at 8% Present value

0 -$10,000 1 -$10,000

1 $5,000 0.92593 $4,629.63

2 $5,000 0.85734 $4,286.69

3 $2,000 0.79383 $1,587.66

Net present value $503.99

hence, the correct option is b. $504