6. Susanne invests $9,000 now and again towards the end of year 3. She gets a fo

Question

6. Susanne invests $9,000 now and again towards the end of year 3.

She gets a following return for 6 years.

Year 0 1 2 3 4 5 6

Cash Flow 2,000 3,000 4,000 4,000 5,000 5,000

Assume Discount rate is 7%, answer the following (15 PTS)

a. What is the Net Present Value of these cash flows? Should Susanne make invest in this opportunity? -(5 PTS)

b. What is the future value of Net Cash Flow (end of year 6) - (5 PTS)

c. If Susanne had another opportunity where her NPV would be $2000. What is her opportunity cost? -

Explanation / Answer

1) Calculation of NPV of the project :

Npv of the project was $1356

2) Calculation of future value of cash flow at 6th year end :

          6th year net cashflow = $5000

                      Discount rate = 7%

                        Future value = 5000 / 0.07

                                             = $71428.57

3) Calculation of Opportunity cost :

             Given that another opportunity where NPV would be $2000 that is more than the NPV of the current project which have NPV of $1356.

            The opportunity cost = $644 (2000 - 1356).

Year Cash flow($) PVAIF@7% Present value($) 0 (9000) 1 (9000) 1 2000 0.935 1870 2 3000 0.873 2619 3 4000 0.816 3264 3 (9000) 0.816 (7344) 4 4000 0.763 3052 5 5000 0.713 3565 6 5000 0.666 3330 NPV 1356

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