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An investor decided to invest $300,000 in a factory in 2005
An investor decided to invest $300,000 in a factory in 2005. He got a return of $75,000 in 2006 and $50,000 in 2007. He sold the factory in 2008 for $220,000. His net present value (NPV) at 4% rate of discount in 2005 is
a. $13,922
b. - $7,786
c. 233,944
d. $313,922
Expert Solution
Answer is a.) $13,922
Solution:
Step 1 Discount Value at 4% or 0.04
| Year n | 2005 | 2006 | 2007 | 2008 |
| Dis(r,n)=1/(1+r)^n | 1/(1+0.04)^0 | 1/(1+0.04)^1 | 1/(1+0.04)^2 | 1/(1+0.04)^3 |
| Dis(4%,n) | 1 | 0.96 | 0.92 | 0.89 |
Step 2 Net Present Value NPV
| Year |
Cash flow A |
Discount value step 1 B |
Present Value A×B |
| 2005 | -$300,000 | 1.00 | -$300,000 |
| 2006 | $75,000 | 0.96 | $72,115.38 |
| 2007 | $50,000 | 0.92 |
$46,227.81 |
| 2008 | $220,000 | 0.89 | $195,579.20 |
| NPV | $13,922.39 |
Therefore NPV is $13,922, and option a is correct.
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