Question

If Quail Company invests $43,000 today, it can expect to receive $12,600 at the end of each year for the next seven years, plus an extra $6,700 at the end of the seventh year. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Enter negative net present values, if any, as negative values. Round your present value factor to 4 decimals.) What is the net present value of this investment assuming a required 8% return on investments?

Answer 1

Net Present value can be calculated by the following equation:

Net present value = Present value of cash inflows - Initial investment

Initial investment = $43000 (given)

Present value of cash inflows = Present value of $12600 annually for 7 years + Present value of $6700 after 7 years

For calculating the present value of $12600 annually for 7 years, we will use the present value of annuity (PVA) of $1 table, because $12600 is an annuity that will be received annually.

And for calculating the present value $6700 after 7 years, we will use the simple present value of $1 table.

So, at given rate of interest of 8%,

Present value of cash inflows = $12600 * PVA (8%, 7 Years) + $6700 * PV (8%, 7 years)

We will use the PVA of $1 table to find the value of PVA (8%, 7 years). Its value from the table is 5.2064

And, we will use the PV of $1 table to find the value of PV (8%, 7 years). Its value from the table is 0.583.

Now, putting these values in the above equation, we get,

Present value of cash inflows = ($12600 * 5.2064) + ($6700 * 0.583)

Present value of cash inflows = $65600.64 + $3906.1

Present value of cash inflows = $69506.74

Now, we will calculate the net present value as per below:

Net present value = Present value of cash inflows - Initial investment

Net present value = $69506.74 - $43000

Net present value = $26506.74