Question

Year Cash Flow Year 1 $38,200 Year 2 $50,600 Year 3 $45,300 Year 4 $42,400 Assume the desired rate of return on a project of this type is 10%. What is the net present value of this project? (Note: Do not round your intermediate calculations.)

Answer 1

Net present value of the cash flows = $139,540

Step-by-step explanation:

Since there is no initial investment, we cannot calculate net present value of this project. Instead we can find the Present value of the cash flow of this project. If we deduct the initial Investment from present value of the cash flow of this project, we can easily find net present value. Assuming initial investment is "0".

Net present value of the cash flows = ∑
`(CF_(t))/((1 + i)^(t))` - Initial Investment

i = rate of return = 10%

Present value of the cash flows = ∑
`(CF_(t))/((1 + i)^(t))`

Present value of the cash flows =
`(38,200)/(1.10^(1))` +
`(50,600)/(1.10^(2))` +
`(45,300)/(1.10^(3))` +
`(42,400)/(1.10^(4))`

Present value of the cash flows = $34,727.2727 + $41,818.1818 + $34,034.5605 + 28,959.7705 = $139,540

Therefore, Net present value of the cash flows = $139,540 - 0 = $139,540.