Question

9.2 Consider the following net cash flows: Year Cash Flow ($) 250 400 500 600 600 a. What is the net present value if the opportunity cost of capital (discount rate) is 10 percent? b. Add an outflow (or cost) of $1,000 at time o. Now, what is the net present value?
draw time lines for a and b

Answer 1

Ans a) present value of cash flow = 250/(1.1) + 400/(1.1)^2 + 500/(1.1)^3 + 600/(1.1)^4 + 600/(1.1)^5

= $1715.87

$0 $250 $400 $500 $600 $600 0 1 2 3 4 5

ans b) present value of cash flow = -1000 + 250/(1.1) + 400/(1.1)^2 + 500/(1.1)^3 + 600/(1.1)^4 + 600/(1.1)^5

= $715.87

-$1000 $250 $400 $500 $600 $600 0 1 2 3 4 5