Question

What would be the net present value of a microwave oven that costs $167 and will save you $76 a year in time and food away from home? Assume an average return on your savings of 5 percent for 5 years. (Hint: Calculate the present value of the annual savings, then subtract the cost of the microwave.) Use Exhibit 1-D. (Round PVA factor to 3 decimal places and final answer to 2 decimal places.)

Answer 1

Answer:

NPV of the microwave: 162.04

Explanation:

we will calcualte the present value of the microwave cost savings of 76 dollars per year using the annuity formula:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 76 dollars

time  5 years

rate   0.05

$76 \times \frac{1-(1+0.05)^{-5} }{0.05} = PV$

PV $329.0402

The net present value will be the present value less investment

329.04 - 167 = 162.04