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Timothy is considering an investment of $10,000. This investment is supposedly going to provide him with...

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Finance

Timothy is considering an investment of $10,000. This investmentis supposedly going to provide him with cash inflows of $2,500 inthe first year and $6,000 a year for the following 2 years. At adiscount rate of zero percent this investment has a net presentvalue (NPV) of _____, but at the relevant discount rate of 18percent the project's NPV is: a. $4,500; $62.03. b. -$1,500;$62.03. c. $4,500; $79.54. d. -$1,500; $79.54. e. $6,000;$98.48.

Answer & Explanation Solved by verified expert
4.0 Ratings (434 Votes)

At 0% discount NPV = -10,000 + 2500 + 6000 + 6000 = 4500

Discount rate 18.0000%
Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow
           (10,000.000) 0                           (10,000.00)                       (10,000.00)
               2,500.000 1                               2,118.64                          (7,881.36)
               6,000.000 2                               4,309.11                       (3,572.249)
               6,000.000 3                               3,651.79

                               79.536
NPV = 79.54

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Transcribed Image Text

Timothy is considering an investment of $10,000. This investmentis supposedly going to provide him with cash inflows of $2,500 inthe first year and $6,000 a year for the following 2 years. At adiscount rate of zero percent this investment has a net presentvalue (NPV) of _____, but at the relevant discount rate of 18percent the project's NPV is: a. $4,500; $62.03. b. -$1,500;$62.03. c. $4,500; $79.54. d. -$1,500; $79.54. e. $6,000;$98.48.

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