Answer:
The net present value of this investment is $3,256.06.
Explanation:
Note: There two errors in the figures provided in this question. They are they therefore fixed before answering this question as follows:
Park Co is considering an investment that requires immediate payment of $28,245 and provides expected cash inflows of $9,300 annually for four years. Assume Park Co requires a 7% return on its investments.
What is the net present value of this investment?
The explanation of the answer is now provided as follows:
The present value (PV) of the annual expected cash inflows of $9,300 can be calculated using the formula for calculating the present value of an ordinary annuity as follows:
PV of the annual expected cash inflows = Annual expected cash inflows * ((1 - (1 / (1 + rate of returns))^number of years) / rate of returns) = $9,300 * ((1 - (1 / (1 + 0.07))^4) / 0.07) = $31,501.06
Net present value = PV of the annual expected cash inflows – Required immediate payment for the investment = $31,501.06 - $28,245 = $3,256.06
Therefore, the net present value of this investment is $3,256.06.
