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12 January, 08:48

Salvatore has the opportunity to invest in a scheme which will pay $ 10 comma 000 at the end of each of the next 5 years. He must invest $ 20 comma 000 at the start of the first year and an additional $ 20 comma 000 at the end of the first year. What is the present value of this investment if the interest rate is 8 %?

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  1. 12 January, 10:05
    0
    Present Value = $1,408.58

    Explanation:

    Giving the following information:

    Year 1 = $20,000 at the beginning and in the end.

    Cash flow year 1 trough 5 = $10,000

    To determine the net present value, we need to use the following formula:

    NPV = - Io + ∑[Cf / (1+i) ^n]

    Cf = cash flow

    Io1 = - 20,000

    Io2 = - 20,000/1.08 = 18,518.52

    Cf1 = 10,000/1.08 = 9,259.26

    Cf2 = 10,000/1.08^2 = 8,573.39

    Cf3 = 10,000/1.08^3 = 7,938.32

    Cf4 = 10,000/1.08^4 = 7,350.30

    Cf5 = 10,000/1.08^5 = 6,805.83

    NPV = - 20,000 - 18,518.52 + 39,927.1

    NPV = 1,408.58
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