An investment that costs $5,000 will produce annual cash flows of $3,000 for 3 years. Using a required return of 8%, the investm

Question

aniked [119]

3 years ago

12

An investment that costs $5,000 will produce annual cash flows of $3,000 for 3 years. Using a required return of 8%, the investm

ent will generate a NPV of $

Mathematics

1 answer:

Bess [88] · Answer 1 · 2022-08-27T12:33:12+03:00

Answer:

The investment will generate a NPV of $2,731.

Step-by-step explanation:

Cost of an investment (PV) = $5,000

Annual cash flows = $3,000

Period of investment = 3 years

Interest rate of return = 8%

Annuity Factor = 2.577 (for 3 years at 8% per year)

Present value of the annuity = $3,000 * 2.577 = $7,731

NPV = Annuity PV minus PV of investment cost

= $7,731 - $5,000

= $2,731

b) The NPV (net present value) of $2,731 is the difference between the present value of the annual cash flows $7,731 and the investment cost of $5,000. The resulting NPV is positive and the investment should be accepted.