Question

Alex invests 50,000 today in a ten year project. At the end of the fifth, seventh, and ninth year he receives a payout of 22,000. Rather than keeping the payouts, Alex reinvests them into a fund that earns a 6% annual effective rate and receive a lump-sum payout ten years from today. What is the net present value of this project valued at an annual rate of interest of 5%.

A. 1,523 B. 4,267 C. -5,907 D. -1,523 E. -4,267

Answer 1

Here answer will be -1523

22000 received at the end of fifth, seventh and ninth year are reinvested at rate of effective interest rate of 6% p.a.

hence amount to be received at the end of 10 year now will be calculated by following formula =

Solving the above we get that Alex will get $78962 at the end of tenth year

Now present value of this amount will be = $78962 X pv factor @5% for tenth year

= 78962 * .6139

= $48475 approx.

NPV = PV of Inflows - Initial Investment

= 48475-50000

= -$1525. or nearly -1523

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