awhat is the present year 0 value if the opportunity cost di

(a)what is the present (year 0) value if the opportunity cost (discount) rate is 10%? (b) add on out flow (or cost) of $1000 at year 0. What is the present value (or net present value) of the stream?

Year

Cash Flow

0

$0

1

$250

2

$400

3

$500

4

$600

5

$600

Solution

a.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=250/1.1+400/1.1^2+500/1.1^3+600/1.1^4+600/1.1^5

which is equal to

=$1715.87(Approx)

B.

NPV=Present value of inflows-Present value of outflows

=(1715.87-1000)

=$715.87(Approx)

(Please note that intermediate calculations have not been rounded off].