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8 December, 10:14

A company is evaluating an investment which has an initial investment of $4,000. Annual net cash flows is expected to be $2,000 over the next three years. The company requires a 10% annual return. The present value of an annuity factor for 10% and 3 periods is 2.4869. The present value of $1 factor for 10% and 3 periods is 0.7513. The net present value is (round your answer to the nearest whole dollar).

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  1. 8 December, 11:34
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    The NPV of the project is $974.

    Explanation:

    The net present value is the today's value of a stream of cash flows. The net present value will be the sum of all the expected future cash flows from a project less the initial investment required for the project and it is used to evaluate the investment decisions.

    The net present value of an investment project will be:

    NPV = CF1 / (1+r) + CF2 / (1+r) ^2 + ... + CFn / (1+r) ^n - Initial investment

    or

    If the cash flows are constant or of same amount through out, occur after the same interval of time and are for a defined period of time, they become an annuity and the NPV of such a project can be calculated by,

    NPV = (Cash flow per period * Present value of Annuity factor) - Initial cost

    The NPV of this project will be = (2000 * 2.4869) - 4000 = 973.8 rounded off to $974
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