You have an opportunity to invest in a business venture. It requires a $250,000
ID: 459157 • Letter: Y
Question
You have an opportunity to invest in a business venture. It requires a $250,000 investment on January 1st. You will receive $70,000 in After-Tax Cash Flows per year on December 31st for 3 years. At the end of 3 years, the project will be terminated, and all assets liquidated. The net terminal value is $80,000. Although the sum of all these cash receipts is $290,000, you realize that the Time Value of Money concept means that those future cash receipts are worth less in "today" dollars. Therefore, for all investment opportunities, you use 10% to analyze the current (i.e., present) value of all future cash flows. The Present Value factors at 10% are Yr 1 = 0.909, Yr 2 = 0.826, and Yr 3 = 0.751 Using those factors, what is the Net Present Value of this investment opportunity?
Explanation / Answer
Cash outflow is indicated by negative, and inflow is indicated by positive
Present Value (PV) is calculated as PV = Cash flow x PV factor
Cash flow at the end of year 3 = $ 70000 + $ 80000 (terminal value) = $ 150000
End of year
Cash Flow
Present Value
0
-250000
-250000
1
70000
63630
2
70000
57820
3
150000
112650
-15900
Therefore, Net Present Value (NPV) of the Investment is -15900
End of year
Cash Flow
Present Value
0
-250000
-250000
1
70000
63630
2
70000
57820
3
150000
112650
-15900
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