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1 May, 15:18

Three people are starting a communications service business. They expect to have net operating losses of $120,000 per year for the first two years, followed by net operating profits of $240,000 per year for the next eight years. The minimum attractive rate of return is 18%. The net present worth of the expected cash flow is most nearly

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  1. 1 May, 15:38
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    The net present worth of the expected cash flow is most nearly

    $514,950

    Explanation:

    To find the Net Present Worth of the cash flow it's necessary to applied the Present Value formula which indicates:

    Present Value = CF / (1 + r) ^t

    CF: Each Cash Flow

    r : Rate of Return

    t : Each moment when the Cash Flow are received.

    Total Present Value : - 101.695 - 86.182 + 146.071 + 123.789 + 104.906 + 88.904 + 75.342 + 63.849 + 54.109 + 45.855 = $514.950

    Period: Year 1 Year 2

    Net Operating - $120,000 - $120,000

    Rate: (1+0,18) ^1 (1+0,18) ^2

    Net Present Value - $101,695 - $86,182

    Period: Year 3 Year 4

    Net Operating $240,000 $240,000

    Rate: (1+0,18) ^3 (1+0,18) ^4

    Net Present Value $146,071 $123,789

    Period: Year 5 Year 6

    Net Operating $240,000 $240,000

    Rate: (1+0,18) ^5 (1+0,18) ^6

    Net Present Value $104,096 $88,904

    Period: Year 7 Year 8

    Net Operating $240,000 $240,000

    Rate: (1+0,18) ^7 (1+0,18) ^8

    Net Present Value $75,342 $63,849

    Period: Year 9 Year 10

    Net Operating $240,000 $240,000

    Rate: (1+0,18) ^9 (1+0,18) ^10

    Net Present Value $54,109 $45,855
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