Susanne invests $10,000 now and again towards the end of year 3. She gets a foll
ID: 2778612 • 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)
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 $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
Net present value NPV = present value of cash inflow- present value of outflows
= cashflow (CF) at year 0 + CF at year 1 /(1+r) + CF at year 2 /(1+r)^2 + ..........
= -10000 +2000/1.06 + 2000/1.06^2 + (4000-10000)/1.06^3 + 5000/1.06^4 + 5000/1.06^5 + 5000/1.06^6
= -149.36
since Npv is negative .Project should be rejected.
B.Future value of net cash flow (FV)= present value × (1+ discount rate)^n
rate =6% , n = 6years
FV = -149.36 ×(1.06)^6
= -211.88
C.If another opportunity exist,then sussane should opt for it since its NPV is positive and higher than the current one.
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