An investment with CF₀= - $120,000 and CFᴊ= +20,000 (J= 1,2,………,10). If the interest rate is 4% compounded annually,
NPV is 42218 , yes the investment is economically acceptable as the NPV is positive and Return on investment is more than the interest rate.
ROR of Investment is 16.667%
Calculation and Explanation
Net present Value ( NPV ) is the present value of future cashflow at a given discount rate .
Formula for NPV = -Initial Cash outflow + Present value of Cash flows
CF0= Intial cash flow at point 0 =$12000
CFj = Anual Cash Inflow (as Positive ) where J is 1 to 10 year =20000 for 10 year
Discount Rate =r =4% compunding annually
NPV= -120000+ $20000×PVAF (4%,10)
NPV =-$120000+$20000×8.110895731
NPV =-1200000+162217.9146
NPV =$42217.91 or $42218
PVAF = Present value annuity factor for 4%, for 10 year , ( refer present value annuity table if provided or u can calculate it in excel by compount interest Pv formula 1/(1+r)n and then adding all 10 year value
( if any issue which this calculation please ask on comment section )
Rate of Return ( ROR ) is the return on the Average capital employed
Net Income ÷ capital employed or Intial Investment
As Nothing is provided about the Net income or non cash expenses it assume that the cashflow is the only income
ROR =20000/120000= 16.667 %
An investment with CF₀= - $120,000 and CFᴊ= +20,000 (J= 1,2,………,10). If the interest rate is...
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