Edmundo Services is considering an investment of $25,000. Data related to the investment are as follows: $\begin{array}{cr}
\text { Year } & \text { Cash Flow } \
1 & \$ 10,000 \
2 & 11,000 \
3 & 8,000 \
4 & 15,000 \
5 & 15,000
\end{array}$ Cost of capital is 14 percent. What is the net present value of the investment, assuming no taxes are paid?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the investment, we discount each of the cash flows back to their present value using the cost of capital (14%) and then sum these values, subtracting the initial investment. The formula for NPV is: $$NPV = \sum \frac{CF_t}{(1+r)^t} - Initial\ Investment$$ where $CF_t$ is the cash flow in year $t$, $r$ is the discount rate (14% or 0.14 in this case), and $t$ is the year.Calculating each year's present value:- Year 1: $\frac{10,000}{(1+0.14)^1} = \frac{10,000}{1.14} = 8,771.93$- Year 2: $\frac{11,000}{(1+0.14)^2} = \frac{11,000}{1.2996} = 8,464.91$- Year 3: $\frac{8,000}{(1+0.14)^3} = \frac{8,000}{1.4815} = 5,401.32$- Year 4: $\frac{15,000}{(1+0.14)^4} = \frac{15,000}{1.6895} = 8,878.37$- Year 5: $\frac{15,000}{(1+0.14)^5} = \frac{15,000}{1.9254} = 7,787.67$Summing these values gives the total present value of the cash flows: $8,771.93 + 8,464.91 + 5,401.32 + 8,878.37 + 7,787.67 = 39,304.20$Subtracting the initial investment of $25,000: $39,304.20 - 25,000 = 14,304.20$The closest answer to our calculation is B) $14,294, acknowledging a slight discrepancy due to rounding in the calculation steps.

Edmundo Services Is Considering an Investment of $25,000 Year Cash Flow 1$10,000211,00038,000415,000515,000\begin{array}{cr}\text { Year } & \text { Cash Flow } \\1 & \$ 10,000 \\2 & 11,000 \\3 & 8,000 \\4 & 15,000 \\5 & 15,000\end{array} Year 12345​ Cash Flow $10,00011,0008,00015,00015,000​

Edmundo Services Is Considering an Investment of $25,000 $\begin{array}{cr}\text { Year } & \text { Cash Flow } \\1 & \$ 10,000 \\2 & 11,000 \\3 & 8,000 \\4 & 15,000 \\5 & 15,000\end{array}$