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Discounted cash flows applicationsNet present Value calculations have a broad range of applications in finance.Calculate the NPV of the project based on the information below.Initial investment: $20,00Cash flow generated each year: $5,000Total period: 5 YearsDiscount rate: 6%

Question

Discounted cash flows applicationsNet present Value calculations have a broad range of applications in finance.Calculate the NPV of the project based on the information below.Initial investment: 20,00Cashflowgeneratedeachyear:20,00Cash flow generated each year: 5,000Total period: 5 YearsDiscount rate: 6%

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Solution

To calculate the Net Present Value (NPV) of the project, we need to follow these steps:

Step 1: Determine the cash flow generated each year. In this case, the cash flow generated each year is $5,000.

Step 2: Determine the total period of the project. In this case, the total period is 5 years.

Step 3: Determine the discount rate. In this case, the discount rate is 6%.

Step 4: Calculate the present value of each cash flow. To do this, we divide the cash flow for each year by (1 + discount rate) raised to the power of the year.

Year 1: 5,000/(1+0.06)1=5,000 / (1 + 0.06)^1 = 4,717.98 Year 2: 5,000/(1+0.06)2=5,000 / (1 + 0.06)^2 = 4,452.83 Year 3: 5,000/(1+0.06)3=5,000 / (1 + 0.06)^3 = 4,200.75 Year 4: 5,000/(1+0.06)4=5,000 / (1 + 0.06)^4 = 3,960.67 Year 5: 5,000/(1+0.06)5=5,000 / (1 + 0.06)^5 = 3,731.78

Step 5: Calculate the NPV by summing up the present values of all cash flows and subtracting the initial investment.

NPV = (4,717.98+4,717.98 + 4,452.83 + 4,200.75+4,200.75 + 3,960.67 + 3,731.78)−3,731.78) - 20,000 NPV = 20,064.01−20,064.01 - 20,000 NPV = $64.01

Therefore, the NPV of the project is $64.01.

This problem has been solved

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