Cheryl Peck purchased a computer network for her classroom. The computer network cost $100,000. She estimates that she can charge $500 for one session in the classroom. Cheryl knows that enrollment will increase over time. She estimates 50 students the first year, 75 students the second year, 100 students the third year, and 150 students the fourth year. If her cost of capital is 16 percent, what is the approximate net present value?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we first need to calculate the cash inflows for each year, then discount those back to their present value using the cost of capital (16%), and finally subtract the initial investment.Year 1: 50 students * $500 = $25,000Year 2: 75 students * $500 = $37,500Year 3: 100 students * $500 = $50,000Year 4: 150 students * $500 = $75,000The present value (PV) of each year's cash inflow is calculated using the formula PV = Cash Inflow / (1 + r)^n, where r is the discount rate (16% or 0.16) and n is the year.Year 1 PV = $25,000 / (1 + 0.16)^1 = $21,551.72Year 2 PV = $37,500 / (1 + 0.16)^2 = $27,900.09Year 3 PV = $50,000 / (1 + 0.16)^3 = $31,546.96Year 4 PV = $75,000 / (1 + 0.16)^4 = $41,882.97Total PV of cash inflows = $21,551.72 + $27,900.09 + $31,546.96 + $41,882.97 = $122,881.74NPV = Total PV of cash inflows - Initial InvestmentNPV = $122,881.74 - $100,000 = $22,881.74Therefore, the approximate net present value is $22,881, which corresponds to choice B.

Cheryl Peck Purchased a Computer Network for Her Classroom