of the accountancy and finance profession 26 of 28 An invest

of the accountancy and finance profession 26 of 28 An investment of $150 000 now is expected to generate annual cash flows of $30,000 for seven years T he first cash flow is in one yoar\'s time sng a discount rate ot 5% p a , what is the netprosent value of the nvestment? Use the annuty lables and do not round your answer) c Previous Question Next Que

Solution

Solution:

Cash Outflow i.e. Estimated amount of Initial Investment at year 0 (today) = $150,000

Life of Project (n=7) = 7 years

Annual Cash Flows = $30,000

We need to find out the present value ordinary annuity factor at 5% for 7 times

PVIFA (R, n) = Present Value interest factor for ordinary annuity at R% for n periods = (1 – 1/(1+R)ⁿ) / R

Here, R = Rate of Interest = 5% or 0.05

N = number of years = 7

PVIFA (5%, 7) = (1 – 1/(1+0.05)⁷) / 0.05 = 5.78637 (Rounded to 5 decimal places) and 5.7863733974 without rounding off.

Present Value of Annual Cash Outflow = Annual Cash Outflow $30,000 * PVIFA (5%, 7) i.e. 5.78637 = $173,591

Net Present Value = Present Value of Cash Outflow $173,591 – Initial Investment i.e. Present Value of Cash Outflow $150,000 = $23,591

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