Stacy is contemplating investing $10,000 in a gizmo machine. The investment is expected to yield $4,000 at the end of each of the next three years. The interest rate is 5 percent. What is the net present value of the expected revenues from the investment?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows to the present value using the formula: NPV = Σ (Cash flow / (1 + r)^t) - initial investment. For this problem, NPV = ($4,000 / 1.05^1) + ($4,000 / 1.05^2) + ($4,000 / 1.05^3) - $10,000 = $10,893.

Stacy Is Contemplating Investing $10,000 in a Gizmo Machine