Consider a piece of equipment for which the expenditure at the beginning of period 1 is $30,000 The net cost at the end of year 1 is $6,000. The net cost at the end of year 2 is $8,000. The net cost at the end of year 3 is $10,000. The net cost at the end of year 4 is $5,000. With an interest rate of 4%, what is the net present value of this cost stream at the beginning of period 1

Question

Lee Mcdonald

Business

13 May, 06:14

Consider a piece of equipment for which the expenditure at the beginning of period 1 is $30,000 The net cost at the end of year 1 is $6,000. The net cost at the end of year 2 is $8,000. The net cost at the end of year 3 is $10,000. The net cost at the end of year 4 is $5,000. With an interest rate of 4%, what is the net present value of this cost stream at the beginning of period 1

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Marcus Blanchard · Answer 1

NPV = - 56,329.66

Explanation:

Giving the following information:

Consider a piece of equipment for which the expenditure at the beginning of period 1 is $30,000 The net cost at the end of year 1 is $6,000. The net cost at the end of year 2 is $8,000. The net cost at the end of year 3 is $10,000. The net cost at the end of year 4 is $5,000.

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

NPV = - Io - ∑[Cf / (1+i) ^n]

Cf = cash flow

In this case, it is all negative because it is all cost.

Year 1 = 6,000/1.04 = 5,769.23

Year2 = 8,000 / 1.04^2 = 7,396.45

Year 3 = 10,000 / 1.04^3 = 8,889. 96

Year 4 = 5,000 / 1.04^4 = 4,274.02

NPV = - 30,000 - 26,329.66 = - 56,329.66