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Present value method and net present value method .given : initial investment 20000, net cash inflows: 1st year 2000 .2nd year 2000 3rd year to 10th year 2500, work out the net present value with a discount rate of 10% and express whether the investment will be worthwhile.? financial management?
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Present value method and net present value method .given : initial inv...
Present Value Method
The present value method is a financial analysis technique used to determine the current value of future cash flows. It takes into account the time value of money, which states that a dollar received in the future is worth less than a dollar received today. By discounting the future cash flows, the present value method allows us to compare different investment opportunities and make informed decisions.
Net Present Value Method
The net present value (NPV) method is a variation of the present value method that calculates the difference between the present value of cash inflows and the initial investment. It provides a measure of the profitability of an investment by considering the time value of money. A positive NPV indicates that the investment is expected to generate a return greater than the discount rate, making it worthwhile. On the other hand, a negative NPV suggests that the investment is expected to generate a return lower than the discount rate, making it not worthwhile.
Given Information
- Initial investment: $20,000
- Net cash inflows:
- 1st year: $2,000
- 2nd year: $2,000
- 3rd year to 10th year: $2,500
Calculation of Net Present Value
To calculate the NPV, we need to discount each cash inflow to its present value and then sum them up. The discount rate provided is 10%.
1st year cash inflow:
PV = $2,000 / (1 + 0.10)^1 = $1,818.18
2nd year cash inflow:
PV = $2,000 / (1 + 0.10)^2 = $1,652.89
3rd year to 10th year cash inflows:
PV = $2,500 / (1 + 0.10)^3 + $2,500 / (1 + 0.10)^4 + ... + $2,500 / (1 + 0.10)^10
= $2,500 * [(1 - (1 + 0.10)^-8) / 0.10] = $16,288.66
Net Present Value:
NPV = PV of cash inflows - Initial investment
= $1,818.18 + $1,652.89 + $16,288.66 - $20,000
= $-6,240.27
Conclusion
The calculated NPV is negative (-$6,240.27), indicating that the investment is expected to generate a return lower than the discount rate of 10%. Therefore, based on the net present value method, the investment is not considered worthwhile.
The present value method is a financial analysis technique used to determine the current value of future cash flows. It takes into account the time value of money, which states that a dollar received in the future is worth less than a dollar received today. By discounting the future cash flows, the present value method allows us to compare different investment opportunities and make informed decisions.
Net Present Value Method
The net present value (NPV) method is a variation of the present value method that calculates the difference between the present value of cash inflows and the initial investment. It provides a measure of the profitability of an investment by considering the time value of money. A positive NPV indicates that the investment is expected to generate a return greater than the discount rate, making it worthwhile. On the other hand, a negative NPV suggests that the investment is expected to generate a return lower than the discount rate, making it not worthwhile.
Given Information
- Initial investment: $20,000
- Net cash inflows:
- 1st year: $2,000
- 2nd year: $2,000
- 3rd year to 10th year: $2,500
Calculation of Net Present Value
To calculate the NPV, we need to discount each cash inflow to its present value and then sum them up. The discount rate provided is 10%.
1st year cash inflow:
PV = $2,000 / (1 + 0.10)^1 = $1,818.18
2nd year cash inflow:
PV = $2,000 / (1 + 0.10)^2 = $1,652.89
3rd year to 10th year cash inflows:
PV = $2,500 / (1 + 0.10)^3 + $2,500 / (1 + 0.10)^4 + ... + $2,500 / (1 + 0.10)^10
= $2,500 * [(1 - (1 + 0.10)^-8) / 0.10] = $16,288.66
Net Present Value:
NPV = PV of cash inflows - Initial investment
= $1,818.18 + $1,652.89 + $16,288.66 - $20,000
= $-6,240.27
Conclusion
The calculated NPV is negative (-$6,240.27), indicating that the investment is expected to generate a return lower than the discount rate of 10%. Therefore, based on the net present value method, the investment is not considered worthwhile.
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Present value method and net present value method .given : initial investment 20000, net cash inflows: 1st year 2000 .2nd year 2000 3rd year to 10th year 2500, work out the net present value with a discount rate of 10% and express whether the investment will be worthwhile.? financial management? for B Com 2025 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about Present value method and net present value method .given : initial investment 20000, net cash inflows: 1st year 2000 .2nd year 2000 3rd year to 10th year 2500, work out the net present value with a discount rate of 10% and express whether the investment will be worthwhile.? financial management? covers all topics & solutions for B Com 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Present value method and net present value method .given : initial investment 20000, net cash inflows: 1st year 2000 .2nd year 2000 3rd year to 10th year 2500, work out the net present value with a discount rate of 10% and express whether the investment will be worthwhile.? financial management?.
Present value method and net present value method .given : initial investment 20000, net cash inflows: 1st year 2000 .2nd year 2000 3rd year to 10th year 2500, work out the net present value with a discount rate of 10% and express whether the investment will be worthwhile.? financial management? for B Com 2025 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about Present value method and net present value method .given : initial investment 20000, net cash inflows: 1st year 2000 .2nd year 2000 3rd year to 10th year 2500, work out the net present value with a discount rate of 10% and express whether the investment will be worthwhile.? financial management? covers all topics & solutions for B Com 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Present value method and net present value method .given : initial investment 20000, net cash inflows: 1st year 2000 .2nd year 2000 3rd year to 10th year 2500, work out the net present value with a discount rate of 10% and express whether the investment will be worthwhile.? financial management?.
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Present value method and net present value method .given : initial investment 20000, net cash inflows: 1st year 2000 .2nd year 2000 3rd year to 10th year 2500, work out the net present value with a discount rate of 10% and express whether the investment will be worthwhile.? financial management?, a detailed solution for Present value method and net present value method .given : initial investment 20000, net cash inflows: 1st year 2000 .2nd year 2000 3rd year to 10th year 2500, work out the net present value with a discount rate of 10% and express whether the investment will be worthwhile.? financial management? has been provided alongside types of Present value method and net present value method .given : initial investment 20000, net cash inflows: 1st year 2000 .2nd year 2000 3rd year to 10th year 2500, work out the net present value with a discount rate of 10% and express whether the investment will be worthwhile.? financial management? theory, EduRev gives you an
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