The Horizon Company will invest $88,000 in a temporary project that will generat
ID: 2775043 • Letter: T
Question
The Horizon Company will invest $88,000 in a temporary project that will generate the following cash inflows for the next three years. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Compute the net present value if the cost of capital is 8 percent. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)
Year Cash Flow 1 $ 24,000 2 32,000 3 61,000
Explanation / Answer
Net Present Value = CF0 + CF1 /(1+r)1 + CF2 /(1+r)2 + CF3 / (1+r)3 ,
where r = cost of capital, and
CF= cash flow
Accordingly CF0=$88,000 , CF1=$24,000 , CF2=$32,000 and CF3=$61,000
r=8%
So, Net Present Value = -88000 + 24000 /(1+0.08)1 + 32000 / (1+0.08)2 + 61000/ (1+0.08)3
= -88000 + 22222.22 + 27350.43 + 48412.70
= $ 9985.35
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