Answer:
The net present value is $1,224.886
Explanation:
The computation of the Net present value is shown below
= Present value of all yearly cash inflows after applying discount factor - initial investment
The discount factor should be computed by
= 1 ÷ (1 + rate) ^ years
where,
rate is 14%
Year = 0,1,2,3
Discount Factor:
For Year 1 = 1 ÷ 1.14^1 = 0.8772
For Year 2 = 1 ÷ 1.14^2 = 0.7695
For Year 3 = 1 ÷ 1.14^3 = 0.675
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 1 + Year 3 cash inflow + sale value × Present Factor of Year 1
= $420× 0.8772 + $420 × 0.7695 + $420 + $16,000 × 0.675
= $368.424 + $323.19 + $110,83.50
= $11,775.114
So, the Net present value equals to
= $13,000 - $11,775.114
= $1,224.886
We take the first four digits of the discount factor.
