The NPV of an investment requiring an initial outlay of $10,000 at a discount rate of 6% which provides end-of-year cash flows of; year 1 - $3,000 (inflow), year 2 - $11,000 (inflow), year 3 - $1,500 (outflow) and year 4 - $7,000 (inflow) will be approximately:

Question

Quizplus · Accepted Answer

To find the NPV of the investment, we need to discount each cash flow to its present value using the given discount rate of 6%, and then sum up all the present values.

Year 0 (initial outlay) = -$10,000

Year 1 = $3,000 / (1+0.06)^1 = $2,830.19

Year 2 = $11,000 / (1+0.06)^2 = $9,755.18

Year 3 = -$1,500 / (1+0.06)^3 = -$1,239.69

Year 4 = $7,000 / (1+0.06)^4 = $5,806.44

NPV = -$10,000 + $2,830.19 + $9,755.18 - $1,239.69 + $5,806.44 = $6,152.12

Therefore, the nearest answer choice is B, $6,905.

The NPV of an Investment Requiring an Initial Outlay of $10,000