Asked by Samantha Stoner on May 29, 2024
Verified
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 four years, what would be the net present value of the investment, assuming an earnings rate of 10%?
A) $23,500
B) $16,050
C) $25,360
D) $1,860
Net Present Value
The difference between the present value of cash inflows and the present value of cash outflows over a period, used in capital budgeting to assess the profitability of investments.
Compound Interest
Interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan.
Cash Inflow
Money that is moving into a business from various sources over a period, such as sales, financing, or investment income.
- Apply the theory of time value of money to determine the present value equivalence of anticipated cash inflows.
Verified Answer
TM
Traveon MurrayJun 01, 2024
Final Answer :
D
Explanation :
The net present value (NPV) is calculated by subtracting the initial investment from the present value of the cash inflows. Using the present value of an annuity table for 10% and 4 years, the factor is 3.170. Thus, the present value of the cash inflows is $8,000 * 3.170 = $25,360. Subtracting the initial investment of $23,500 gives an NPV of $25,360 - $23,500 = $1,860.
Learning Objectives
- Apply the theory of time value of money to determine the present value equivalence of anticipated cash inflows.