Susanne invests $10,000 now and again towards the end of year 3. She gets a foll
ID: 2778529 • Letter: S
Question
Susanne invests $10,000 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
2,000
4,000
5,000
5,000
5,000
Assume Discount rate is 6%, answer the following (15 PTS)
What is the Net Present Value of these cash flows? Should Susanne make invest in this opportunity? -(5 PTS)
What is the future value of Net Cash Flow (end of year 6) - (5 PTS)
If Susanne had another opportunity where her NPV would be $1000. What is her opportunity cost? - (5 PTS)
Year
0
1
2
3
4
5
6
Cash Flow
2,000
2,000
4,000
5,000
5,000
5,000
Explanation / Answer
1. Computation of Net Present value
Year Cash flows Discount@ 6% Present value of cash inflows
1 2000 0.9434 1886.8
2 2000 0.8900 1780
3 4000 0.8396 3358.4
4 5000 0.7921 3960.5
5 5000 0.7473 3736.5
6 5000 0.7050 3525
Total present value of cash inflows 18247.2
less : initial investment (10000)
NPV 8247.2
2. Computation of future value of net cash flows
FV = Present value (1 + i )n
= $18247.2 ( 1+ 6% )6 =$ 25884
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