What is the net present value for a $55,000 investment (−$55,000 in year zero) and cash inflows of $20,000 per year for years 1 through 4, using a 4% discount rate?
A) $16,921.06
B) $25,000
C) −$25,000
D) −$16,921.06

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash inflows back to their present value and then subtracting the initial investment. Using a 4% discount rate, the NPV of receiving $20,000 per year for 4 years, with an initial investment of $55,000, is calculated as follows:Year 1: $20,000 / (1 + 0.04)^1 = $19,230.77Year 2: $20,000 / (1 + 0.04)^2 = $18,493.82Year 3: $20,000 / (1 + 0.04)^3 = $17,787.71Year 4: $20,000 / (1 + 0.04)^4 = $17,110.68Sum of present values = $19,230.77 + $18,493.82 + $17,787.71 + $17,110.68 = $72,622.98NPV = Sum of present values - Initial investment = $72,622.98 - $55,000 = $17,622.98The correct answer closest to the calculated NPV is $16,921.06, acknowledging a slight discrepancy due to rounding or calculation differences in the options provided.

What Is the Net Present Value for a $55,000 Investment