Gamma Company is considering an investment of $500,000 in a land development project. It will yield cash flows of $200,000 for 5 years. The company uses a discount rate of 9%. What is the net present value of the investment? Present value of annuity of $1:
$$\begin{array} { | l | l | l | l | }
\hline & 3 \% & 9 \% & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.24 & 3.17 \
\hline 5 & 3.993 & 3.89 & 3.791 \
\hline
\end{array}$$

Question

Gamma Company is considering an investment of $500,000 in a land development project. It will yield cash flows of $200,000 for 5 years. The company uses a discount rate of 9%. What is the net present value of the investment? Present value of annuity of $1:
$$\begin{array} { | l | l | l | l | } 
\hline & 3 \% & 9 \% & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.24 & 3.17 \
\hline 5 & 3.993 & 3.89 & 3.791 \
\hline
\end{array}$$

Quizplus · Accepted Answer

The net present value (NPV) is calculated by multiplying the annual cash flow by the present value annuity factor for 5 years at 9%, then subtracting the initial investment. NPV = ($200,000 * 3.89) - $500,000 = $778,000 - $500,000 = $278,000.

Gamma Company Is Considering an Investment of $500,000 in a Land