Question

The Hopkins Company has estimated that a proposed project’s 10-year annual net cash benefit, received each year end, will be $2,500 with an additional terminal benefit of $5,000 at the end of the 10th year. Information on present value factors is as follows: Present value of $1 at 8% at the end of 10 periods .463 Present value of an ordinary annuity of $1 at 8% for 10 periods 6.710 Assuming that these cash inflows satisfy exactly Hopkins’ required rate of return of 8%, what is the initial cash outlay?

Answer 1

Answer:

the present value of the project at 8% discount rate is 19,090

this will be the cost ofthe investment.

Explanation:

we will calcualtethe present value of a 10 years annuity at 8% return

and the present value of a lump sum in 10 years

2,500 x 6.710 annuity factor     = 16,775

5,000 x 0.463 lump sum factor = 2,315

                       TOTAL                  19,090