Sam Weller is thinking of investing $70,000 to start a bookstore.Sam plans to withdraw $15,000 from the business at the end of each year for the next five years.At the end of the fifth year,Sam plans to sell the business for $110,000 cash.At a 12% discount rate,what is the net present value of the investment? (Ignore income taxes in this problem.)

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows to their present value and subtracting the initial investment. The cash flows include the annual withdrawals and the sale of the business. The NPV is calculated as follows: NPV = -$70,000 + ($15,000 / (1+0.12)^1) + ($15,000 / (1+0.12)^2) + ($15,000 / (1+0.12)^3) + ($15,000 / (1+0.12)^4) + ($15,000 / (1+0.12)^5) + ($110,000 / (1+0.12)^5). Calculating these values gives an NPV of approximately $46,445.

Sam Weller Is Thinking of Investing $70,000 to Start a Bookstore.Sam