Answer:
c) $86.87
Explanation:
The computation of the Net present value is shown below
= Present value of all yearly cash inflows after implementation of discount factor - initial investment
The discount factor should be determined by
= 1 ÷ (1 + rate) ^ years
where,
rate is 12.5%
Year = 0,1,2,3,4
Discount Factor:
For Year 1 = 1 ÷ 1.125^1 = 0.8889
For Year 2 = 1 ÷ 1.125^2 = 0.7901
For Year 3 = 1 ÷ 1.125^3 = 0.7023
For Year 4 = 1 ÷ 1.125^4 = 0.6243
So, the calculation of a Present value of all yearly cash inflows are shown below
= Year 1 cash inflow × Present Factor of Year 1 + Year 2 cash inflow × Present Factor of Year 2 + Year 3 cash inflow × Present Factor of Year 3 + Year 4 cash inflow × Present Factor of Year 4
= $1,280 × 0.8889 + $0 × 0.7901 + $6,980 × 0.7023 + $2,750 × 0.6243
= $1,137.778 + $0 + $4,902.277 + $1,716.811
= $7,756.87
Therefore, the Net present value equivalent to
= $7,756.87 - $7,670
= $86.87
We take the discount factor's first four digits.
