The Net Present Value of the Investment is -$1,064
<h3><u>SOLUTION</u></h3>
- “Net present value is the present value of the cash flows at the required rate of return of your project compared to your initial investment,” In practical terms, it's a method of calculating your return on investment, or ROI, for a project or expenditure.
- An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.
Annual Cash Inflows $3000
Present Value Factor 3.312127,
Present Value of Cash Inflows $9936
Less: Initial Investment $11,000
Net Present Value -$1,064
<h3><u>EXPLANATION</u></h3>
- In net present value method the future cash inflows rate are discounted to present net value at discount rate (PV FACTOR)
- The rationale for discounting is money received today is more valuable than the money to be received in future.
- So the present value of cash inflows is compared with initial investment if net present value is positive then the project is accepted otherwise its rejected.
In this case the net present value is negative, hence the project will be rejected.
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