Figure 14-6.Present value of $1
Present value of an Annuity of $1

-Refer to Figure 14-6. Roman Knoze is considering two investments. Each will cost $20,000 initially. Project 1 will return annual cash flows of $10,000 in each of three years. Project 2 will return $5,000 in year 1, $10,000 in year 2, and $15,000 in year 3. Roman requires a minimum rate of return of 10%. What is the net present value of Project 1? (Note: there may be a rounding error depending on the table you use to compute your answer. Choose the answer closest to the one you calculate.)

Question

Figure 14-6.Present value of $1
  Present value of an Annuity of $1
 
-Refer to Figure 14-6. Roman Knoze is considering two investments. Each will cost $20,000 initially. Project 1 will return annual cash flows of $10,000 in each of three years. Project 2 will return $5,000 in year 1, $10,000 in year 2, and $15,000 in year 3. Roman requires a minimum rate of return of 10%. What is the net present value of Project 1? (Note: there may be a rounding error depending on the table you use to compute your answer. Choose the answer closest to the one you calculate.)

Quizplus · Accepted Answer

The net present value (NPV) of Project 1 is calculated by discounting the future cash flows back to their present value at the required rate of return (10%) and then subtracting the initial investment. The calculation is as follows: NPV = ($10,000 / (1+0.10)^1) + ($10,000 / (1+0.10)^2) + ($10,000 / (1+0.10)^3) - $20,000 = $9,091 + $8,264 + $7,513 - $20,000 = $24,868 - $20,000 = $4,868. Due to rounding differences, the closest answer provided is $4,860.

Figure 14-6.Present Value of $1