Using the tables above,if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the next 4 years,what would be the net present value of the investment,assuming an earnings rate of 10%?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the investment, we first need to discount each of the annual cash inflows of $8,000 back to their present value using the 10% discount rate. Then, we subtract the initial investment of $23,500 from the sum of these discounted cash inflows.The formula for calculating the present value (PV) of a future cash inflow is: PV = Cash Inflow / (1 + r)^n, where r is the discount rate (10% or 0.10 in this case) and n is the number of years in the future the cash inflow occurs.Year 1: PV = $8,000 / (1 + 0.10)^1 = $8,000 / 1.10 = $7,272.73Year 2: PV = $8,000 / (1 + 0.10)^2 = $8,000 / 1.21 = $6,611.57Year 3: PV = $8,000 / (1 + 0.10)^3 = $8,000 / 1.331 = $6,010.57Year 4: PV = $8,000 / (1 + 0.10)^4 = $8,000 / 1.4641 = $5,466.51Sum of discounted cash inflows = $7,272.73 + $6,611.57 + $6,010.57 + $5,466.51 = $25,361.38NPV = Sum of discounted cash inflows - Initial investment = $25,361.38 - $23,500 = $1,861.38Rounding to the nearest whole number, the NPV is approximately $1,860, which corresponds to option D.

Using the Tables Above,if an Investment Is Made Now for $23,500