Question

The annual profit from an investment is $ 25 comma 000 each year for 5 years and the cost of investment is $ 75 comma 000 with a salvage value of $ 40 comma 000. The cost of capital at this risk level is 14​%.

Answer 1

Answer:

Year Cashflow [email protected]%             PV

            $                         $

0         (75,000)                1  (75,000)

1-5          25,000          3.4331     85,828

5               40,000          0.5194             20,776

                                                   NPV     31,604

Explanation:

In this question, we need to consider the initial outlay in year 0. The cashflows for year 1 to year 5 will be discounted at present value of annuity factor of 3.4331, which could be obtained from present value of annuity table. The salvage value will be considered in year 5 and discounted at the discount factor for year 5, which could also be obtained from present value table. Thus, net present value is calculated by adding the present value of cash inflows for year 1 to 5 to the present value of salvage value and deduct the initial outlay.