To calculate the net present value (NPV) of this investment, we need to discount the future cash flows to their present value using the interest rate of 9.0%.
The formula to calculate the present value (PV) of a future cash flow is:
PV = CF / (1 + r)^n
Where CF is the future cash flow, r is the interest rate, and n is the number of years.
For the cash flows given:
PV1 = $20,000 / (1 + 0.09)^1 = $20,000 / 1.09^1 ≈ $18,348.62
PV2 = $25,000 / (1 + 0.09)^2 = $25,000 / 1.09^2 ≈ $20,726.40
PV3 = $30,000 / (1 + 0.09)^3 = $30,000 / 1.09^3 ≈ $23,193.89
PV4 = $35,000 / (1 + 0.09)^4 = $35,000 / 1.09^4 ≈ $25,746.60
PV5 = $110,000 / (1 + 0.09)^5 = $110,000 / 1.09^5 ≈ $70,115.30
To calculate the NPV, we subtract the initial investment of $60,000 from the sum of the present values of the future cash flows:
NPV = PV1 + PV2 + PV3 + PV4 + PV5 - Initial Investment
NPV = $18,348.62 + $20,726.40 + $23,193.89 + $25,746.60 + $70,115.30 - $60,000
NPV ≈ $98,330.81
Therefore, the correct option is D) $98,330.81 (rounded to the nearest cent).
An investment you purchased today for $60,000 will pay $20,000 in 1 year and $25,000,$30,000,$35,000 and finally $110,000 at the end of each of the next years respectively. If interest rates are 9.0% (per year). What is the Net present value of this investment? A) $65,082.71 B) $38,156.06 C) $28,042.51 D) $98,843.46 E) $51,964.27
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