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.$1,860

b.$16,050

c.$25,360

d.$23,500

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

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$8000[1-(1.1)^-4]/0.1

=$8000*3.170

=$25360

NPV=Present value of inflows-Present value of outflows

=$25360-$23500

=$1860

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