A project has an anticipated stream of annual net receipts of $20,000. Its life is 6 years. No salvage value is expected at the end of the 6 years. If the price of the project is $80,000 and the applicable discount rate is 10%, the net present value of the project is $7,106.

Question

Quizplus · Accepted Answer

The net present value of the project is calculated as the present value of the future cash flows minus the initial investment. The present value of the future cash flows is calculated as the sum of the present values of each individual cash flow. The present value of each individual cash flow is calculated as the cash flow multiplied by the discount factor. The discount factor is calculated as 1 / (1 + r)^n, where r is the discount rate and n is the number of years. In this case, the present value of the future cash flows is calculated as $20,000 * (1 / (1 + 0.1)^1) + $20,000 * (1 / (1 + 0.1)^2) + $20,000 * (1 / (1 + 0.1)^3) + $20,000 * (1 / (1 + 0.1)^4) + $20,000 * (1 / (1 + 0.1)^5) + $20,000 * (1 / (1 + 0.1)^6) = $87,106. The net present value of the project is calculated as $87,106 - $80,000 = $7,106.

A Project Has an Anticipated Stream of Annual Net Receipts