# Calculating Net Present and future Values

1.Calculate the NPV for each of the following investments. The opportunity cost of capital is 20% for all four investments.

Investment Initial Cash Expenditures Year 1 Cash Flow

A ($10,000) $18,000

B ($ 5.000) $ 9,000

C ($ 5,000) $ 5,700

D ($ 2,000) $ 4,000

A. What is the NPV of each investment?

B. Which investment is the most valuable?

2.A factory costs $800,000. You believe that it will produce an inflow after operating costs of $170,000 a year for 10 years. If the opportunity cost of capital is 14%, what is the NPV of the factory? What will the factory be worth at the end of five years?

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Solutions:

1.Calculate the NPV for each of the following investments. The opportunity cost of capital is 20% for all four investments.

Investment Initial Cash Expenditures Year 1 Cash Flow

A ($10,000) $18,000

B ($ 5.000) $ 9,000

C ($ 5,000) $ 5,700

D ($ 2,000) $ 4,000

A. What is the NPV of each investment?

NPV of Investment A= ...

#### Solution Summary

Solution describes the steps for determining net present and future values.

Calculating net investment, net cash flows and net present value

1. Find the Net Investment for both options. Which option is more attractive based solely on this evaluation?

2. Calculate the Net Cash Flows for both options. Which option is more attractive based solely on this evaluation?

3. Briefly explain the reasons for any difference in your answer in question 1 and question 2 or why both support the same option.

4. Find the Net Present Value of each investment.

5. Which investment would Bob most likely recommend given his recommendation to use the Net Present Value method? Why?

6. Why would Bob tell Joe and Mary not to base their comparison on the future values of the cash flows, as they were intuitively doing before they went to see him?

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