A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years. If the cost of capital is 5%, the net present value of this investment is approximately
A) $20,920.
B) $26,160.
C) $49,840.
D) $70,920.
E) $106,990.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows to the present value and subtracting the initial investment. The formula for NPV is: NPV = ∑ (Cash flow / (1 + r)^t) - Initial investment. For this problem, NPV = ($20,000 / 1.05^1) + ($20,000 / 1.05^2) + ($20,000 / 1.05^3) + ($20,000 / 1.05^4) - $50,000. Calculating this gives approximately $20,920.

A Capacity Alternative Has an Initial Cost of $50,000 and Cash