Gamma Corporation is considering an investment of $516,000 in a land development project.The investment will yield cash inflows of $200,000 per year for five years.The company uses a discount rate of 9%.What is the net present value of the investment? Present value of an ordinary annuity of $1:
$$\begin{array} { | l | r | r | r | }
\hline &{ 8 \% } &{ 9 \% } & { 10 \% } \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.24 & 3.17 \
\hline 5 & 3.993 & 3.89 & 3.791 \
\hline
\end{array}$$

Question

Gamma Corporation is considering an investment of $516,000 in a land development project.The investment will yield cash inflows of $200,000 per year for five years.The company uses a discount rate of 9%.What is the net present value of the investment? Present value of an ordinary annuity of $1:
$$\begin{array} { | l | r | r | r | } 
\hline &{ 8 \% } &{ 9 \% } & { 10 \% } \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.24 & 3.17 \
\hline 5 & 3.993 & 3.89 & 3.791 \
\hline
\end{array}$$

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the cash inflows at the given discount rate and then subtracting the initial investment. Using the present value of an ordinary annuity table, for 5 years at 9%, the factor is 3.89. Thus, the present value of the cash inflows is $200,000 * 3.89 = $778,000. Subtracting the initial investment of $516,000 gives an NPV of $262,000.

Gamma Corporation Is Considering an Investment of $516,000 in a Land