Question

If Quail Company invests $50,000 today, it can expect to receive $10,000 at the end of each year for the next seven years, plus an extra $6,000 at the end of the seventh year. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round your present value factor to 4 decimals.) What is the net present value of this investment assuming a required 10% return on investments?

Answer 1

Answer:

Net Present Value = $1,762.95

Explanation:

Equal payments made at the end of each year implies that the cash inflows from year 1 to 7 form an annuity where:

$PVof An Ordinary Annuity= \frac{PMT[1-(1+i)^{-n} ] }{i}$

where PMT is the the equal payment cash inflow received at the end of each period  and

$\frac{[1-(1+i)^{-n} ] }{i}$ = The present value of an annuity factor for n years at i%

The present value of an annuity factor for 7 years at 10% equals

$\frac{[1-(1+0.1)^{-7} ] }{0.1}=4.8684$

therefore: Net Present value of this investment given a 10% return o investments equals

$-50,000+10,000*4.8684+\frac{6,000}{1.1^7}=1,762.95$