An investment that costs $20,000 will produce annual cash flows of $5,000 for a period of 6 years.Further,the investment has an expected salvage value of $3,000.Given a desired rate of return of 12%,what will the investment generate? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round your intermediate calculations.Round your answer to the nearest whole dollar.)

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the investment, we need to find the present value (PV) of the cash inflows and outflows.
PV of cash inflows = PV of annuity + PV of salvage value
PV of annuity = $5,000 x (PVA of $1 for 6 years at 12%) = $5,000 x 4.111 = $20,555
PV of salvage value = $3,000 x (PV of $1 for 6 years at 12%) = $3,000 x 0.567 = $1,701
PV of cash inflows = $20,555 + $1,701 = $22,256
PV of cash outflow (investment cost) = $20,000
NPV = PV of cash inflows - PV of cash outflow = $22,256 - $20,000 = $2,256
Since the NPV is positive ($2,256), the best choice is A: A positive net present value of $2,077.

An Investment That Costs $20,000 Will Produce Annual Cash Flows