Gamma Company is considering an investment proposal that would require an initial outlay of $800,000, and would yield yearly cash flows of $200,000 for 9 years. The company uses a discount rate of 10%. What is the NPV of the investment?
Present value of annuity of $1:
$$\begin{array} { | c | c | c | c | }
\hline & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.24 & 3.17 \
\hline 5 & 3.993 & 3.89 & 3.791 \
\hline 6 & 4.623 & 4.486 & 4.355 \
\hline 7 & 5.206 & 5.033 & 4.868 \
\hline 8 & 5.747 & 5.535 & 5.335 \
\hline 9 & 6.247 & 5.995 & 5.759 \
\hline
\end{array}$$

Question

Gamma Company is considering an investment proposal that would require an initial outlay of $800,000, and would yield yearly cash flows of $200,000 for 9 years. The company uses a discount rate of 10%. What is the NPV of the investment? 
Present value of annuity of $1:
$$\begin{array} { | c | c | c | c | } 
\hline & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.24 & 3.17 \
\hline 5 & 3.993 & 3.89 & 3.791 \
\hline 6 & 4.623 & 4.486 & 4.355 \
\hline 7 & 5.206 & 5.033 & 4.868 \
\hline 8 & 5.747 & 5.535 & 5.335 \
\hline 9 & 6.247 & 5.995 & 5.759 \
\hline
\end{array}$$

Quizplus · Accepted Answer

The NPV is calculated by multiplying the annual cash flow by the present value annuity factor for 9 years at 10%, then subtracting the initial investment: $200,000 * 5.759 - $800,000 = $351,800.

Gamma Company Is Considering an Investment Proposal That Would Require