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 %?

Question

Judah Mcintyre

Business

3 April, 03:04

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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Answers (1)

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Holly Hanson · Answer 1

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