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Computing Net Present Value Using Table Values

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Problem 1

You have an opportunity to invest in a business venture. It requires a $250,000 investment on January 1st. You will receive $70,000 in After-Tax Cash Flows per year on December 31st for 3 years.

At the end of 3 years, the project will be terminated, and all assets liquidated.

The net terminal value is $80,000.

Although the sum of all these cash receipts is $290,000, you realize that the Time Value of Money concept means that those future cash receipts are worth less in "today" dollars.

Therefore, for all investment opportunities, you use 10% to analyze the current (i.e., present) value of all future cash flows.

The Present Value factors at 10% are Yr 1 = 0.909, Yr 2 = 0.826, and Yr 3 = 0.751

Using those factors, what is the Net Present Value of this investment opportunity?

Problem 2

You have an opportunity to invest in a business venture. For just $50,000 invested on January 1st, you will receive $20,000 in After-Tax Cash Flows per year on December 31st for 3 years.

As you know, if all you cared about was a Nominal Payback Period of "less than 3 years" for your investments, then this would be a good investment since $50,000 / $20,000 = 2.50 years.

However, your financial advisor has told you to consider the "Time Value of Money" whenever looking at a potential investment.

Your advisor suggests that you use Present Value factors at 10%.

Yr 1 = 0.909, Yr 2 = 0.826, and Yr 3 = 0.751

Using these factors, what is the Net Present Value of this investment opportunity?

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Solution Summary

This solution illustrates how to compute the net present value of an investment with a terminal value using present value table values provided.

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