Alpha Company is considering an investment of $1,000,000 in a land development project. It will yield cash flows of $300,000 for 5 years. Alpha uses a discount rate of 7%. What is the net present value of the investment?
$\begin{array}{|l|l|l|l|l|l|l|}
\hline \text { Present}\
\text {Value of an}\
\text {Annuity of}\
\$ 1 \
\hline &5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \%\
\hline 1& 0.95 & 0.943 & 0.93 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.859 & 1.833 & 1.809 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.729 & 2.673 & 2.624 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 & 3.240 & 3.170 \
\hline 5 & 4.329 & 4.212 & 4.10 d & 3.993 & 3.890 & 3.791 \
\hline
\end{array}$

Question

Alpha Company is considering an investment of $1,000,000 in a land development project. It will yield cash flows of $300,000 for 5 years. Alpha uses a discount rate of 7%. What is the net present value of the investment?
$\begin{array}{|l|l|l|l|l|l|l|}
\hline \text { Present}\
\text {Value of an}\
\text {Annuity of}\
 \$ 1 \ 
\hline &5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \%\ 
\hline 1& 0.95 & 0.943 & 0.93 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.859 & 1.833 & 1.809 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.729 & 2.673 & 2.624 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 & 3.240 & 3.170 \
\hline 5 & 4.329 & 4.212 & 4.10 d & 3.993 & 3.890 & 3.791 \
\hline
\end{array}$

Quizplus · Accepted Answer

The net present value of the investment is $330,000. The present value of the cash flows is $1,330,000 ($300,000 x 4.329). The net present value is the present value of the cash flows minus the initial investment, which is $330,000 ($1,330,000 - $1,000,000).

Alpha Company Is Considering an Investment of $1,000,000 in a Land