Below is a table for the present value of $1 at compound interest. Below is a ta

Question

Below is a table for the present value of $1 at compound interest.

Below is a table for the present value of an annuity of $1 at compound interest.

Using the tables above, if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the next 4 years, what would be the net present value of the investment, assuming an earnings rate of 10%?

a.$25,360

b.$23,500

c.$1,860

d.$16,050

Year 6% 10% 12% 1 0.943 0.909 0.893 2 0.890 0.826 0.797 3 0.840 0.751 0.712 4 0.792 0.683 0.636 5 0.747 0.621 0.567

Explanation / Answer

Net Present Value of the Investment: {Net Period Cash Flow/(1+R)^T} - Initial Investment where R is the rate of return and T is the number of time periods. = [8000/(1+.1)1]+ [8000/(1+.1)2]+ [8000/(1+.1)3]+ [8000/(1+.1)4]-23500 = (8000/1.1)+ (8000/1.21)+ (8000/1.331)+ (8000/1.4641)-23500 = $           1,860.00

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