Multiple Choice QuestionAn investment that costs $30,000 will produce annual cash flows of $10,000 for 4 years. Using a required return of 8%, the investment will generate (rounded to the nearest dollar) a:Present Value of 1RatePeriods7%8%9%40.76290.73500.7084Present Value of an Annuity of 1RatePeriods7%8%9%43.38723.31213.2397Multiple choice question.negative NPV of $3,121.positive NPV of $3,121.positive NPV of $33,121.negative NPV of $31,121.
Question
Multiple Choice QuestionAn investment that costs 10,000 for 4 years. Using a required return of 8%, the investment will generate (rounded to the nearest dollar) a:Present Value of 1RatePeriods7%8%9%40.76290.73500.7084Present Value of an Annuity of 1RatePeriods7%8%9%43.38723.31213.2397Multiple choice question.negative NPV of 3,121.positive NPV of 31,121.
Solution
To solve this question, we need to calculate the Net Present Value (NPV) of the investment. The NPV is calculated by subtracting the initial cost of the investment from the present value of its future cash flows.
Step 1: Calculate the present value of the future cash flows.
We are given that the investment will produce annual cash flows of $10,000 for 4 years. The required return (or discount rate) is 8%.
Looking at the "Present Value of an Annuity of 1" table, we find that the factor for an 8% rate and 4 periods is 3.3121.
We multiply this factor by the annual cash flow to get the present value of the future cash flows:
33,121
Step 2: Calculate the NPV.
We subtract the initial cost of the investment from the present value of the future cash flows:
30,000 = $3,121
So, the investment will generate a positive NPV of $3,121.
Therefore, the correct answer is: positive NPV of $3,121.
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