Sam Weller is thinking of investing $70,000 to start a bookstore.Sam plans to earn $15,000 cash from the business at the end of each year for the next five years.At the end of the fifth year,Sam plans to sell the business for $110,000 cash.At a 12% discount rate,what is the net present value of the investment? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

Question

Quizplus · Accepted Answer

The net present value of the investment is $46,489. This is calculated by taking the present value of the cash flows from the business over the next five years and subtracting the initial investment of $70,000. The present value of the cash flows is calculated by multiplying each cash flow by the present value factor for the appropriate year. The present value factor is calculated by dividing 1 by (1 + discount rate)^year. In this case, the discount rate is 12%, so the present value factor for year 1 is 1 / (1 + 0.12)^1 = 0.8929. The present value of the cash flows for the next five years is:Year 1: $15,000 x 0.8929 = $13,393.50Year 2: $15,000 x 0.7972 = $11,958.00Year 3: $15,000 x 0.7118 = $10,677.00Year 4: $15,000 x 0.6355 = $9,532.50Year 5: $15,000 x 0.5674 + $110,000 x 0.5674 = $70,074.00The total present value of the cash flows is $13,393.50 + $11,958.00 + $10,677.00 + $9,532.50 + $70,074.00 = $115,635.00. Subtracting the initial investment of $70,000 gives a net present value of $46,489.

Sam Weller Is Thinking of Investing $70,000 to Start a Bookstore.Sam