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Question 5 Seventeen Seconds, Inc. is considering a long-term investment. The investment will require an investment of $40,000. It will have a useful life of 2 years, and no salvage (i.e., ending) value. Annual cash savings from the investment are $22,000. Assume that cash flows other than the initial investment occur at the end of the year, and that the cost of capital (i.e., discount rate) is 10%. Calculate the net present value of the investment

Respuesta :

The net present value of the investment is

Solution: Total NPV for 2 years = NPV for 1st year + NPV for 2nd year

Total NPV = [tex]\frac{22,000}{(1+0.1)} + \frac{22,000}{(1+0.1)^{2} } - 40,000[/tex]

Total NPV = 20,000 + 18,181.81 - 40,000 = - 1818.19

If the net present value is negative, the future income won't be worth more than the investment's initial cost.

What is the Net Present Value (NPV)?

  • The concept of net present value (NPV) is used to calculate the current value of all projected future cash flows, including the initial capital expenditure.
  • It is frequently used in capital budgeting to identify the projects that are most likely to generate a profit.
  • The discounted present value of all future cash flows associated with a project or investment will be positive and so appealing if the net present value (NPV) of that project or investment is positive.
  • You must predict future cash flows for each period and choose the appropriate discount rate in order to calculate NPV.
  • The formula for one cash flow for one year

NPV =  [tex]\frac{Cash Flow}{(1+i)^{t} } - Initial Investment[/tex]

where:

i=Required return or discount rate

t=Number of time periods

  • ​The formula for more than one cash flow for more than one year NPV is equal to the the NPV of both the years simultaneously.

Know more about Net Present Value (NPV) https://brainly.com/question/27557482

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