Question

Salvatore has the opportunity to invest in a scheme which will pay $ 10 comma 000 at the end of each of the next 5 years. He must invest $ 20 comma 000 at the start of the first year and an additional $ 20 comma 000 at the end of the first year. What is the present value of this investment if the interest rate is 8​%?

Answer 1

Answer:

Present Value= $1,408.58

Explanation:

Giving the following information:

Year 1= $20,000 at the beginning and in the end.

Cash flow year 1 trough 5= $10,000

To determine the net present value, we need to use the following formula:

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

Io1= -20,000

Io2= -20,000/1.08= 18,518.52

Cf1= 10,000/1.08= 9,259.26

Cf2= 10,000/1.08^2= 8,573.39

Cf3= 10,000/1.08^3= 7,938.32

Cf4= 10,000/1.08^4= 7,350.30

Cf5= 10,000/1.08^5= 6,805.83

NPV= -20,000 - 18,518.52 + 39,927.1

NPV= 1,408.58